HLG: 29 May 2008 Kinsteel -

HLG: 29 May 2008 Kinsteel - Q108 beat forecast on ASP hikes


Kinsteel Bhd HOLD



Price target RM1.70



Share price at 28 May RM1.62



Investment summary


Q108 net profit of RM62m was 6-12% ahead of forecasts/consensus. We have turned positive on Kinsteel, as we think strong ASP hikes cancel out risk from a near-term gas price hike. However, Kinsteel’s heavy gearing makes EV/EBITDA valuations look rich (8x adjusted for Perwaja minorities, vs. sector cycle peak valuations of 6x). We are positive on Malaysia’s steel sector due to: (1) a rebound in domestic demand from the construction sector; (2) Chinese steel export curbs, which creates a benign pricing environment for Malaysian producers.



Buy on dips

We have turned positive on Kinsteel, and now think the strength of the steel up-cycle outweighs risks from higher coal and iron ore prices. There could be arbitrage opportunities from the Perwaja IPO (1:4 Perwaja offer for Kinsteel minorities).

Kinsteel Q407

FY07 fuelled by stronger steel prices

Comment on Results

Kinsteel's 4Q07 net profit grew 82% y-o-y to RM37.8m driven by stronger steel prices. This brought YTD net profit (ex EI) to RM135.3m, an improvement of >100% y-o-y. 4Q07 revenue grew 58% y-o-y on higher sales volume.

Q-o-q, 4Q07 net profit fell 7% due to higher tax of RM2.0m in the quarter
(3Q07: RM0.4m). Effective tax rate for FY07, however, was lower than the
statutory rate due to utilization of capital allowances.