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Wednesday, March 21, 2018

Steel stocks poised for re-rating

Wednesday, 21 Mar 2018

Ready for shipping: A file picture showing steel coils produced at a steel mill in Indiana being prepared for shipping. Local steel stocks have fallen 18.3 after the US announced proposed tariffs on steel and aluminium imports. — AFP

UOB Kay Hian says steel firms may report another set of strong Q1 earnings in May

PETALING JAYA: Share price weakness of steel stocks, partly due to an overreaction to the US import tariff on Chinese products, should see a re-rating during a possibly strong first-quarter 2018 results season in May, said UOB Kay Hian.

In a sector update report yesterday, the research house opined that steel companies may report another strong set of earnings for the first quarter, with gross profit per tonne potentially expanding to RM733 per tonne.

This is based on UOB Kay Hian’s generic model and quarter-to-date steel price of RM2,717 per tonne. “The sector’s current share price weakness, partly as a result of the US tariff on imported steel and aluminium, may present a good buying opportunity.

“For steel stocks under our coverage, share prices weakened by an average of 18.3% from their recent highs compared to Chinese steel companies, which saw an average decline of 17.1%,” said UOB Kay Hian.

It added that the outlook for steel remains promising, given the sustainably high local steel prices that are supported by industry consolidation in China.

The research house expects local steel demand to gradually improve on the back of the commencement of various mega and infrastructure projects.

“We also reiterate our view that the tariff imposed on imported steel and aluminium by the US should not have a significant impact on local steel players, given that excess supply from US imports should easily be absorbed given the aggressive capacity cuts by China.

“In addition, logistically, it would be economically inefficient for US steel suppliers such as Canada, Brazil and Mexico to divert excess supply to Asia,” said UOB Kay Hian.

In February 2018, local steel bar and billet prices declined marginally by 2.7% and 2% to RM2,725 per tonne and RM2,375 per tonne, respectively.

Despite the slight decline, the research house said that local steel prices are still on the high side and well-supported by rising steel consumption, as well as the safeguard duty on imported steel.

For companies under UOB Kay Hian’s coverage, Ann Joo Resources Bhd
s reported results that came in within its estimates, while Choo Bee Metal Industries Bhd
 reported stronger-than-expected earnings.

“Ann Joo, a long steel player, reported a 12.2% quarter-on-quarter (q-o-q) growth in core net profit in the fourth quarter of 2017, thanks to a higher average selling price of 3.2% q-o-q increase to RM2,494 per tonne, moderately higher sales volume and lower effective tax rate thanks to an income tax exemption order.

“For Choo Bee, earnings for the fourth quarter saw a 33.1% q-o-q improvement, largely supported by strong growth from the manufacturing division as well as the trading division,” said UOB Kay Hian.

The research house added that Ann Joo was a prime beneficiary from rising price demand for long steel products, given its hybrid manufacturing facility, as well as effective capital management.

Meanwhile, Choo Bee maintained its net cash position in 2017 with the net cash level making up 19% of its market cap.

UOB Kay Hian has maintained its “buy” call on Ann Joo based on a nine times price-earnings (PE) multiple of the 2019 earnings per share (EPS), and has reiterated its “buy” call on Choo Bee based on a PE multiple of seven times the 2019 EPS.

Ann Joo closed 2.1% lower at RM3.28, trading on a volume of 1.07 million shares, while Choo Bee closed 1.6% lower at RM2.50, with 97,300 shares changing hands.


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