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

Perwaja Holdings Share Price

Fair Value
:
:
RM1.13
RM1.12
In Line, Expecting Weaker 2H Recom : Underperform
(Downgraded)

Table 1 : Investment Statistics (PERWAJA; Code: 5146) Bloomberg: PERH MK

Net 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 1,571.2 -115.5 -20.6 -13.0 n.m. n.m. - 0.7 0.9 -12.4 -
2010F 2,095.9 75.4 13.5 13.7 >100 8.3 - 0.6 0.8 7.5 -
2011F 2,193.4 91.6 16.4 15.9 16.6 7.1 - 0.6 0.7 8.3 -
2012F 2,193.4 101.6 18.1 17.3 8.8 6.5 - 0.5 0.5 8.4 -
Main Market Listing / Trustee Stock / Syariah-Approved Stock By The SC * Consensus Based On IBES Estimates

♦ In line. 1QFY12/10 core net profit of RM22.7m accounted for 30.1% of our RHBRI Vs. Consensus
Above -
full-year forecast. However, we consider this within our expectation as we
In Line -
expect Perwaja’s performance to weaken in 2H on the back of weaker Below -
restocking activities in 2H arising from weaker price outlook.
Issued Capital (m shares) 560.0
♦ YoY. 1QFY12/10 returned to the black with a core net profit of RM22.7m
Market Cap (RMm) 632.8
(vs. a net loss of RM56.4m a year ago). This was mainly due to: Daily Trading Vol (m shs) 0.7
1. Higher selling prices and sales volume. Recall, global steel prices 52wk Price Range (RM) 0.95 – 1.78
plunged in 2H08 and started to recover only from 2Q09 onwards; and Major Shareholders: (%)
Kinsteel 37.3
2. A 30.7% decline in finance cost on lower net debt and cost of financing.
Equal Concept 31.4
♦ QoQ. Despite revenue falling by 9.0% to RM373.7m (on lower sales
volumes), 1QFY12/10 core net profit rose by 77.8% to RM22.7m from
FYE Dec FY10 FY11 FY12
RM12.7m in the previous quarter. This was driven mainly by: EPS Revision (%) - - -
1. Better economies of scale arising from better selling prices and Var to Cons (%) - - -
improved plant efficiencies; and
Share Price Chart
2. An 8.9% decline in finance costs.
♦ Earnings to peak in 2Q, expecting weaker 2H. We believe Perwaja’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
products. Relative Performance To FBM KLCI

♦ Risks. The risks include: (1) Global steel consumption recovers earlier than
expected; (2) Lower-than-expected production costs, which means higher- Perwaja Holdings

than-expected profitability; and (3) Concerns on overcapacity subsides

earlier than expected. FBM KLCI

♦ Earnings forecasts. Unchanged.

♦ Investment case. Indicative fair value is RM1.12 based on 7x FY12/11
fully-diluted EPS of 15.9 sen, in line with our 1-year forward target PER of
7x for the steel sub-sector. Downgrade from outperform to Underperform,
Chye Wen Fei
following our downgrade in earnings and 1-year forward target PER for the
(603) 92802172
steel sub-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 Chg
Revenue 318.5 373.7 17.4 Due to higher selling prices and sales volumes.
Operating profit/ (loss) -47.6 40.5 >100 Margin expansion arising from: (1) Better selling prices; and (2)
Better economies of scale on the back of higher utilisation rate.
Finance costs -25.8 -17.9 -30.7 Due to: (1) Lower cost of financing (1Q10: 10.7%; 1Q09:
12.1%); and (2) Lower net debt, which declined to RM809.6m
from RM849.6m a year ago.
Pretax profit/ (loss) -73.4 22.7 >100 Filtered down from operating profit.
Taxation 16.9 0.0 NM
Core net profit/ (loss) -56.4 22.7 >100 Filtered down from pretax profit.
Other comprehensive income 0.0 0.1 NM
Net profit/ (loss) -56.4 22.7 >100
Core EPS (sen) -10.1 4.0 >100 Filtered down from pretax loss.
EPS (sen) -10.1 4.1 >100

Operating margin (%) -14.9 10.8 25.8 pts

Pretax margin (%) -23.0 6.1 29.1 pts
Core net profit margin (%) -17.7 6.1 23.8 pts
Effective tax rate (%) 23.1 0.0 -23.1 pts

Table 3: Earnings Review (QoQ)

FYE Dec 2009 2010 % QoQ Observations/ Comments
(RMm) 4Q 1Q Chg
Revenue 410.8 373.7 -9.0 Due to lower sales volumes (on the back of scheduled
maintenance) that more than offset higher selling prices.
Operating profit/ (loss) 32.2 40.5 25.7 Margin expansion arising from: (1) Higher selling prices; and
(2) Improved plant efficiencies.
Finance costs -19.6 -17.9 -8.9 Net debt decreased to RM809.6m from RM891.7m in the
previous quarter.
Pretax profit/ (loss) 12.6 22.7 79.4 Helped further by lower finance costs.
Taxation 0.1 0.0 NM
Core net profit/ (loss) 12.7 22.7 77.8 Filtered down from pretax profit.
Other comprehensive income 0.0 0.1 NM
Net profit/ (loss) 12.7 22.7 78.3
Core EPS (sen) 2.3 4.0 77.8
EPS (sen) 2.3 4.1 78.3

Operating margin (%) 7.8 10.8 3.0 pts

Pretax margin (%) 3.1 6.1 3.0 pts
Core net profit margin (%) 3.1 6.1 3.0 pts
Effective tax rate (%) -0.9 0.0 0.9 pt

Table 4: Earnings Forecasts Table 5: Forecast Assumptions

FYE Dec 2009A 2010F 2011F 2012F 2010F 2011F 2012F

Revenue 1,571.2 2,095.9 2,193.4 2,193.4 Annual Capacity ('000 tonnes)

Growth (%) -32.3 33.4 4.7 0.0 DRI 1,650 1,800 1,800
Billet 1,950 2,600 2,600
EBITDA -129.2 223.4 235.3 233.4
EBITDA margin -8.2 10.7 10.7 10.6 Production Volume ('000 tonnes)
DRI 1,450 1,500 1,500
Depreciation & amortisation 73.9 -70.4 -68.4 -66.5 Billet 1,100 1,200 1,200
Net interest expense -87.3 -77.6 -75.2 -65.2
Average Selling Price (US$/tonne)
Pretax profit -142.5 75.4 91.6 101.6 DRI 400 420 420
Tax expense 27.0 0.0 0.0 0.0 Billet 515 525 525
Net Profit -115.5 75.4 91.6 101.6
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.

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

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