PP 7767/09/2010(025354)

26 May 2010

Malaysia Corporate Highlights

RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

R e su l ts N o t e
26 May 2010
MARKET DATELINE

Kinsteel Share Price

Fair Value
:
:
RM0.78
RM0.64
In Line; Anticipating Weaker 2H Recom : Underperform
(Downgraded)

Table 1 : Investment Statistics (KINSTEL; Code: 5060) Bloomberg: KSB MK

Net Core FD EPS Net
FYE Turnover Profit EPS EPS Growth PER# C.EPS* P/NTA Gearing ROE GDY
Dec (RMm) (RMm) (sen) (sen) (%) (x) (sen) (x) (x) (%) (%)
2009A 1,928.1 18.3 1.9 -1.3 NM NM - 1.2 2.0 2.3 1.0
2010F 1,615.7 83.3 8.8 7.9 >100 12.5 10.8 1.1 1.6 9.5 1.7
2011F 1,990.7 96.7 10.2 9.2 16.1 10.8 12.5 1.1 1.4 11.1 1.7
2012F 1,990.7 99.2 10.4 9.4 2.6 10.5 14.5 0.9 1.1 9.4 1.7
Main Market Listing / Trustee Stock / Syariah-Approved Stock By The SC * Consensus Based On IBES Estimates

♦ In line. 1QFY12/10 reported core net profit of RM22.6m came in at 27.1% of RHBRI Vs. Consensus
Above
our full-year consensus. However, we consider this within our expectation as
In Line
we expect Kinsteel’s performance to weaken in 2H on the back of weaker Below
restocking activities arising from weaker price outlook. As against the market
expectations, the results came in below, accounting for only 22.0% of the Issued Capital (m shares) 941.2
full-year market consensus. Market Cap(RMm) 741.5
Daily Trading Vol (m shs) 5.4
♦ YoY. 1QFY12/10 returned to the black with a core net profit of RM22.6m (vs. 52wk Price Range (RM) 0.755 – 1.18
a net loss of RM34.8m a year ago). This was mainly due to: Major Shareholders: (%)
1. Higher selling prices and sales volume. Recall, global steel prices Tan Sri Pheng Yin Huah 34.2
Maju Holdings 20.6
plunged in 2H08 and started to recover only from 2Q09 onwards; and
Unifund 4.4
2. A 26.4% decline in finance cost on lower cost of financing.
FYE Dec FY10 FY11 FY12
♦ QoQ. Despite revenue rising by 38.2% to RM540.4m, 1QFY12/10 core net EPS Revision (%) - - -
profit declined by 45.1% to RM22.6m from RM41.1m in the previous quarter. Var to Cons (%) -18.7 -18.9 -28.1
This was mainly due to the absence of one-off items. Recall, Kinsteel recorded
EI gains of approximately RM32m from the reversal of provision on Share Price Chart

impairment.
♦ Earnings to peak in 2Q, expecting weaker 2H. We believe Kinsteel’s
earnings will peak in 2QFY12/10 (on higher sales volumes, coupled with
margin expansion arising from selling prices that outpaced its raw material
costs). Beyond 1HFY12/10, we believe earnings are likely to weaken
significantly on the back of: (1) Heightened risks of a sharper-than-
expected slowdown in global economy; and (2) Falling input prices (such as
iron ore and scraps) that will hurt both consumption and prices of steel Relative Performance To FBM KLCI
products.
♦ Risks. The risks include: (1) Global steel consumption recovers earlier than
expected; (2) Lower-than-expected production costs, which means higher- FBM KLCI
than-expected profitability; and (3) Concern on overcapacity subsides
earlier than expected. Kinsteel

♦ Earnings forecasts. Maintained.

♦ Investment case. Indicative fair value is RM0.64 based on 7x FY12/11 fully-
diluted EPS of 9.4 sen, in line with our 1-year forward target PER of 7x for the
steel sub-sector. Downgrade from outperform to Underperform, following Chye Wen Fei
our downgrade in earnings and 1-year forward target PER for the steel sub- (603) 92802172
sector (refer to the building materials sector update today). chye.wen.fei@rhb.com.my

Please read important disclosures at the end of this report.

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Table 2: Earnings Review (YoY Cumulative)

FYE Dec 2009 2010 % YoY Observations/ Comments
(RMm) 3M 3M Change
Turnover 440.3 540.4 22.7 Boosted by higher selling prices and sales volumes.
Operating profit/ (loss) -56.8 63.7 >100 Margin expansion arising from higher selling prices.
Finance costs -36.5 -26.9 -26.4 Due to: (1) Lower cost of financing; and (2) Lower net debt, which
reduced to RM1,522.9m from RM1,536.1m a year ago.
Pretax profit/ (loss) -93.3 36.8 >100 Boosted further by lower financing costs.
Taxation 16.9 -0.1 NM
Minority interest 41.6 -14.2 NM 37%-owned Perwaja returned to the black.
Core net profit/ (loss) -34.8 22.6 >100 Filtered down from pretax profit
Other comprehensive income 0.0 0.0 NM
Net profit/ (loss) -34.8 22.6 >100 Filtered down from pretax loss.
Core EPS (sen) -3.7 2.4 >100
EPS (sen) -3.7 2.4 >100

Operating margin (%) -12.9 11.8 24.7 pts

Pretax margin (%) -21.2 6.8 28.0 pts
Core net profit margin (%) -7.9 4.2 12.1 pts
Effective tax rate (%) 18.1 0.3 -17.8 pts

Table 3: Earnings Review (QoQ)

FYE Dec 2009 2010 % QoQ Observations/ Comments
(RMm) 4Q 1Q Change
Turnover 390.9 540.4 38.2 Mainly due to: (1) Higher selling prices; and (2) Higher sales
volumes for the downstream operations.
Operating profit 79.3 63.7 -19.7 Due to the absence of one-off items. Recall , Kinsteel recorded
RM32m EI gains arising from the reversal of provision for
impairment.
Finance costs -27.0 -26.9 -0.7 Net debt decreased to RM1,536.1m from RM1,600.1m in the
previous quarter.
Pretax profit 52.3 36.8 -29.6 Partly mitigated by slightly lower finance costs.
Taxation -1.3 -0.1 -90.4
Minority interest -9.9 -14.2 43.4 Improved performance at 37%-owned Perwaja.
Core net profit 41.1 22.6 -45.2 Filtered down from pretax profit.
Other comprehensive income 0.0 0.0 NM
Net profit 41.1 22.6 -45.1
Core EPS (sen) 4.3 2.4 -45.2
EPS (sen) 4.3 2.4 -45.1

Operating margin (%) 20.3 11.8 -8.5 pts

Pretax margin (%) 13.4 6.8 -6.6 pts
Core net profit margin (%) 10.5 4.2 -6.3 pts
Effective tax rate (%) 2.5 0.3 -2.2 pts

Table 4: Earnings Forecasts Table 5: Forecast Assumptions

FYE Dec (RMm) 2009A 2010F 2011F 2012F FYE Dec 2010F 2011F 2012F

Turnover 1,928.1 1,615.7 1,990.7 1,990.7 Capacity (‘000 tonnes p.a.)

Turnover growth (%) -21.6 -16.2 23.2 0.0 DRI 1,800 1,800 1,800
Billets 1,800 1,800 1,800
EBITDA 140.2 439.5 468.1 466.2 Bars 500 500 500
EBITDA margin (%) 7.3 27.2 23.5 23.4 Wire Rod 200 200 200
Sections & Beams 500 500 500
Depreciation -111.9 -115.5 -114.8 -114.1
Finance costs -126.4 -143.4 -137.6 -111.3 Production Volume (‘000 tonnes p.a.)
DRI 1,450 1,450 1,450
Pretax profit -98.1 180.6 215.8 240.8 Billets 1,100 1,100 1,100
Tax 42.8 -5.3 -6.2 -7.0 Bars 300 300 300
Minorities 73.6 -92.0 -112.9 -134.6 Wire Rod 100 100 100
Net profit 18.3 83.3 96.7 99.2 Sections & Beams 200 200 200
EI -32.0 0.0 0.0 0.0
Core net profit -13.7 83.3 96.7 99.2 RM/US$ 3.30 3.25 3.30
Source: Company data, RHBRI estimates

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IMPORTANT DISCLOSURES

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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on
higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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