In the red. Southern Steel disappointed with a net loss of RM0.3m in 1HFY06/13, vis-à-vis our full-year forecast of RM50.8m net profit and the full-year consensus net profit of RM66.1m, and a RM8.6m net profit achieved in 1HFY06/12. We believe the key variances against our forecast were lower-than-expected sales volumes and selling prices achieved, and hence lower margins realised, on the back of an influx of cheap imports in the local market, especially wire rod products.

Risks. The risks include: (1) A stronger-than-expected recovery in global steel consumption and hence prices; and (2) Lower-than-expected input costs.

Earnings forecasts. We are cutting FY06/13-15 net profit forecasts by 18- 20%, having reduced our assumptions on sales volumes and selling prices.

Maintain Neutral. The global outlook for the steel sector in 2013 is likely to remain challenging due to the excess capacity and weak recovery in demand but we believe the steel industry is near to the bottom of the cycle. Accelerating output cuts, massive destocking activities coupled with recently announced pro-growth policy in China will provide a strong support for international steel prices. Locally, steel consumption will be sustained by large-scale infrastructure projects under ETP and stable growth for automotive and manufacturing (particularly electrical goods) sectors. Fair value is cut to RM1.41 (from RM1.72) based on 0.7x (from 0.8x) tangible book value of RM2.02, having rationalised the valuation to be more in line with its historical average during downcycles.

Source: RHB Research - 31 Jan 2013