HwangDBS sees stronger steel demand ahead

HWANGDBS Vickers Research said current steel prices are being supported by restocking activities, and while the prices of steel bars and rods of between RM2,200 and RM2,300 per tonne could dip at the end of the year although upcoming mega projects will help maintain prices in 2010.

“Although the timing of these mega projects is still fluid, we understand that packages of the more imminent low-cost carrier terminal and Pahang-Selangor water transfer projects are likely to be awarded by end-2009 and 2Q10, respectively,” the research house said.

With the current restocking activities improving steel demand, utilisation at most steel mills had risen since June 2009, with KINSTEEL BHD []’s upstream utilisation jumping to 100% from 50%, and SOUTHERN STEEL BHD []’s overall utilisation rising from a low of 50%.

It added that as a result of the improved utilisation, coupled with stronger steel prices, gross margins improved in 2Q09, with Southern Steel recording a 2% gross profit margin versus an 11% gross loss in 1Q09, while Kinsteel’s gross loss narrowed 33% quarter-on-quarter.

“We anticipate margins to continue to improve over the next few quarters, and foresee better earnings visibility in FY10-FY11F,” it said.

HwangDBS Vickers also said in addition to the government’s mega projects expected to deliver “meaningful new demand in FY10-FY11, the sector should benefit from a weaker US dollar versus the ringgit. It said between 60% and 70% of domestic scrap requirements, mainly denominated in dollar, and all iron ore were imported.

The research house also expected 3Q09 to show positive operating earnings compared to losses in 1H09, driven by margin improvement as a result of recovering steel prices and higher capacity utilisation, while the inventory holding period had also improved to three months from between four and six months at the start of the year. It said following that, both Southern Steel and Kinsteel had stronger cash flow positions.

Meanwhile, it said going forward, downside risks for steel players should be limited following the recovery in feedstock prices, with the international price for iron ore at stable levels for the past 10 months, and now hovering at an average of US$103/tonne (RM349).

The research house has upgraded Southern Steel and Kinsteel to buy from hold, with target prices of RM2.40 and RM1.30, respectively.

The target prices were based on 1.3 times net tangible asset (NTA), consistent with one standard deviation of the respective historical means. “At our target prices for Southern Steel and Kinsteel, they would be trading at 12.1 times and 13.7 times CY10F earnings,” added HwangDBS.