PP 7767/09/2010(025354

)

10 March 2010

Malaysia

Corporate Highlights
V is it Note

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

MARKET DATELINE

10 March 2010 Share Price Fair Value Recom : : : RM1.45 RM1.79 Outperform (Maintained)

Perwaja Holdings
Better Quarters Ahead

Table 1 : Investment Statistics (PERWAJA; Code: 5146) Net FYE Dec 2009A 2010F 2011F 2012F Turnover (RMm) 1,571.2 2,187.2 2,284.9 2,298.1 Profit (RMm) -115.5 84.2 127.9 135.5 EPS (sen) -20.6 15.0 22.8 24.2 FD EPS (sen) -13.0 14.9 21.0 22.1 EPS Growth (%) n.m. >100 40.9 5.1 PER# (x) n.m. 9.7 6.9 6.6 C.EPS* (sen) P/NTA (x) 0.9 0.8 0.7 0.6 Net

Bloomberg: PERH MK Gearing (x) 0.9 0.8 0.6 0.4 ROE (%) -12.4 8.3 11.1 10.6 GDY (%) -

Main Market Listing / Trustee Stock / Syariah-Approved Stock By The SC

* Consensus Based On IBES Estimates Issued Capital (m shares) Market Cap(RMm) Daily Trading Vol (m shs) 52wk Price Range (RM) Major Shareholders: Kinsteel Equal Concept 560.0 812.0 1.2 0.59 – 1.78 (%) 37.3 31.4

Anticipates 2010 benchmark iron ore contract price to rise 20-40%. Perwaja anticipates iron ore benchmark prices in 2010 (Apr 2010 – Mar 2011) to rise by 20-40%, given the global iron ore miners’ improved bargaining power amidst sustained steel consumption in China. Given its relatively flat production cost curve in 1HFY12/10 (as Perwaja has already locked in iron ore pellets at low prices in anticipation of higher iron ore prices going forward), Perwaja anticipates a steep margin expansion in 1HFY12/10 from the rising global steel price trend.

Competitiveness of DRI plant remains despite having anticipated Var to C.EPS (%) higher production costs. While higher iron ore pellet price will increase Perwaja’s billets production cost, Perwaja feels that it will still have an edge Share Price Chart over the other upstream steel producers (which use alternative feedstock such as scraps and pig iron in their steelmaking process), as prices of alternative feedstock have increased even more substantially. Capacity expansion on track, but blast furnace project remains unfeasible. Perwaja is on track to expand the capacity at both its DRI and steelmaking plants by 20% and 55% to 1.8m tonnes/annum and 2.1m tonnes/annum by mid-2010. However, Perwaja hinted that its blast furnace investment project will remain shelved.

FYE Dec EPS chg (%)

FY10 -

FY11 -

FY12 -

Perwaja’s view on Vale’s pelletising plant project in Perak. Perwaja Relative Performance To FBM KLCI feels that Vale’s plan to set up a regional iron ore hub in Manjung, Perak is unlikely to result in lower iron ore price for Perwaja, given Vale’s significantly stronger bargaining power relative to Perwaja. Nevertheless, Perwaja Perwaja Holdings believes the presence of iron ore distribution hub will help reducing its working capital requirement (and hence reducing finance cost) as it can then stock up less iron ore pellets. Risks. Risks for the steel sector include: (1) Oversupply in China that results in dumping activities by Chinese steel producers in the international market; (2) Steep contraction in global steel consumption that will weigh down on international steel prices; and (3) Higher-than-expected energy costs, in particular, natural gas and electricity. Earnings forecasts. Maintained. Investment case. Indicative fair value is RM1.79 based on 12x FY12/10 EPS of 14.9 sen, in line with our 1-year forward target PER of 12x for the long steel product sector. Maintain Outperform.
Please read important disclosures at the end of this report. Chye Wen Fei (603) 92802172 chye.wen.fei@rhb.com.my
FBM KLCI

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10 March 2010

Visit Note

Anticipates 2010 benchmark iron ore contract price to rise 20-40%. Perwaja anticipates iron ore benchmark prices in 2010 (Apr 2010 – Mar 2011) to rise by 20-40%, given the global iron ore miners’ improved bargaining power amidst sustained steel consumption in China (the world’s largest steel consumer and producer). This is evidenced in iron ore spot prices, which have risen by 33.3% since Dec 09 (see Chart 1). In anticipation of a steep rise in iron ore prices in 2010, Perwaja has recently concluded two cargoes of iron ore pellets (equivalent to approximately 260,000 tonnes) at US$140/tonne (that is roughly 25% higher than its 2009 contract iron ore pellet price of US$110/tonne). With the additional two cargoes of iron ore pellets, Perwaja will have sufficient iron ore pellets for its direct reduction iron (DRI) plant until Jun 10. Given its relatively flat production cost curve in 1HFY12/10, Perwaja anticipates a steep margin expansion in 1HFY12/10 from the rising global steel price trend, underpinned by the anticipated sharp rise in 2010 iron ore benchmark prices.
Chart 1: Iron Ore Fines Spot Price Movement in China
US $ / t o nne 1 45 1 40 1 35 1 30 1 25 1 20 15 1 10 1 1 05 1 00

Source: Bloomberg

Competitiveness of DRI plant remains despite higher production costs. While the higher iron ore pellet price will increase Perwaja’s billet production cost, Perwaja feels that it will still have an edge over the other upstream steel producers (which use alternative feedstock such as scraps and pig iron in their steelmaking process), as prices of alternative feedstock have increased even more substantially (see Charts 2-4). Perwaja believes that prices of pig iron and scraps are likely to rise further in the near term, as: 1. 2. The availability of scraps will remain scarce in the international market on the back of the still weak scrap collection activities in advanced economies; and Prices of both iron ore fines and metallurgical coke (which are the key inputs in producing pig iron) are likely to sustain (if not increasing further) on the back of a strong utilisation rate in the Chinese steel sector (the world’s largest steel producer).
Chart 2: Iron Ore Pellet Spot Price Movement
US $ / t o nne 1 50 1 45 1 40 1 35 1 30 1 25 1 20 15 1 10 1

Chart 3: Iron Ore Fines Spot Price Movement
US $ / t o nne 1 45 1 40 1 35 1 30 1 25

+26.7%

1 20 15 1 10 1 1 05 1 00

+32.9%

Source: Bloomberg Source: Bloomberg A comprehensive range of market research reports by award-winning economists and analysts are exclusively available for download from www.rhbinvest.com

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10 March 2010
Chart 4: Ferrous Scrap Price Movement
US $ / t o nne 340 330 320 31 0 300 290 280 270 260 250

+30.1%

Source: Bloomberg

Capacity expansion on track, but blast furnace project remains unfeasible. Perwaja is on track to expand the capacity at both its DRI and steelmaking plants by 20% and 55% to 1.8m tonnes/annum and 2.1m tonnes/annum by mid-2010. However, Perwaja hinted that its blast furnace investment project will remain shelved, given: 1. 2. The high prices of metallurgical coke (which is the key energy source in operating a blast furnace); and Overcapacity in the flat steel product sector (in particular steel plates) remains admidst slow demand recovery and rising capacity (in particular, China).

Perwaja’s view on Vale’s pelletising plant project in Perak. Perwaja feels that Vale’s plan to set up a regional iron ore hub in Manjung, Perak (targeted to commence by 2012) is unlikely to result in lower iron ore price for Perwaja, given Vale’s significantly stronger bargaining power (which controls more than 15% of the iron ore in the world) relative to Perwaja. Nevertheless, Perwaja believes the presence of an iron ore distribution hub in Malaysia will help reducing its working capital requirement (and hence reducing finance cost) as it can then stock up less iron ore pellets.

Earnings forecasts

Earnings forecasts. Maintained. In our FY12/10-12 forecasts, we have yet to incorporate the additional capacity of 1.3m tonnes of billets p.a. arising from the restoration of legacy steelmaking plants that will come on stream by mid-2010.

Risks

Risks to our view. The risks include: (1) Oversupply in China that results in dumping activities by Chinese steel producers in the international market; (2) Steep contraction in global steel consumption that will weigh down on international steel prices; and (3) Higher-than-expected energy costs, in particular, natural gas and electricity.

Valuations And Recommendation

Investment case. We continue to like Perwaja for: 1. 2. 3. The improving steel sub-sector outlook, underpinned by the implementation of stimulus packages by various economies and reduced concerns on dumping activities by major steel producing nations; Perwaja’s structural advantages over its competitors; and Perwaja’s strong earnings growth from FY12/10, underpinned by: (1) Higher average selling prices; (2) Higher sales volumes; and (3) Lower production costs.

Indicative fair value is RM1.79 based on 12x FY12/10 EPS of 14.9 sen, in line with our 1-year forward target PER of 12x for the long steel product sector. Maintain Outperform.

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10 March 2010
Table 2: Earnings Forecasts FYE Dec (RMm) Revenue Growth (%) EBITDA EBITDA margin Depreciation & amortisation Net interest expense Pretax profit Tax expense Net Profit 2009A 2010F 2011F 2012F Table 3: Forecast Assumptions FYE Dec Annual Capacity ('000 tonnes) DRI Billet Production Volume ('000 tonnes) DRI Billet Average Selling Price (US$/tonne) DRI Billet RM:US$ 400 525 3.25 420 535 3.30 410 530 3.25 1,450 1,200 1,500 1,300 1,500 1,300 1,650 1,950 1,800 2,600 1,800 2,600 2010F 2011F 2012F

1,571.2 2,187.2 2,284.9 2,298.1 -32.3 -129.2 -8.2 73.9 -87.3 -142.5 27.0 -115.5 39.2 249.5 11.4 -70.4 -94.9 84.2 0.0 84.2 4.5 263.5 11.5 -68.4 -67.2 127.9 0.0 127.9 0.6 257.4 11.2 -66.5 -55.4 135.5 0.0 135.5

IMPORTANT DISCLOSURES
This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank Berhad (previously known as RHB Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances as may be permitted by applicable law. The opinions and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may differ or be contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be construed as an offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein in any manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated persons may from time to time have an interest in the securities mentioned by this report. This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Neither RHBRI, RHB Group nor any of its affiliates, employees or agents accepts any liability for any loss or damage arising out of the use of all or any part of this report. RHBRI and the Connected Persons (the “RHB Group”) are engaged in securities trading, securities brokerage, banking and financing activities as well as providing investment banking and financial advisory services. In the ordinary course of its trading, brokerage, banking and financing activities, any member of the RHB Group may at any time hold positions, and may trade or otherwise effect transactions, for its own account or the accounts of customers, in debt or equity securities or loans of any company that may be involved in this transaction. “Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding company and the respective directors, officers, employees and agents of each of them. Investors should assume that the “Connected Persons” are seeking or will seek investment banking or other services from the companies in which the securities have been discussed/covered by RHBRI in this report or in RHBRI’s previous reports. This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflect information known to, professionals in other business areas of the “Connected Persons,” including investment banking personnel. The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues. 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. RHBRI is a participant of the CMDF-Bursa Research Scheme and will receive compensation for the participation. securities, subject to the duties of confidentiality, will be made available upon request. Additional information on recommended

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