PP 7767/09/2010(025354)

10 March 2010

Malaysia Corporate Highlights

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

V is it Note
10 March 2010
MARKET DATELINE

Kinsteel Share Price

Fair Value
:
:
RM1.00
RM1.22
Better Demand Ahead Recom : Outperform
(Maintained)

Table 1 : Investment Statistics (KINSTEL; Code: 5060) Bloomberg: KSB 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 1,928.1 18.3 1.9 -1.3 NM NM - 1.2 2.0 2.3 1.0
2010F 1,546.5 106.8 11.2 10.2 >100 9.8 10.3 1.1 1.6 11.9 1.7
2011F 2,049.2 123.0 12.9 11.7 15.2 8.5 13.0 1.1 1.4 13.7 1.7
2012F 2,062.3 124.9 13.1 11.9 1.5 8.4 - 0.8 1.0 11.1 1.7
Main Market Listing / Trustee Stock / Syariah-Approved Stock By The SC * Consensus Based On IBES Estimates

♦ Yet to see signs of a pick-up in demand for downstream steel Issued Capital (m shares) 950.5
products. YTD, Kinsteel has yet to see signs of a pick-up in demand for Market Cap(RMm) 950.5
downstream steel products (such as steel bars and wire rod). However, Daily Trading Vol (m shs) 8.0
Kinsteel feels that demand for downstream steel products will pick up in 52wk Price Range (RM) 0.36 – 1.18
2HFY12/10, underpinned by: (1) The implementation of the remaining Major Shareholders: (%)
Tan Sri Pheng Yin Huah 34.2
projects under the two stimulus packages; (2) Increased property
Maju Holdings 20.6
development activities; and (3) More intense restocking activities by steel
Unifund 4.4
stockists ahead of the announcement of 10MP.
FYE Dec FY10 FY11 FY12
♦ Anticipating higher contribution from 37.3%-owned Perwaja from EPS chg (%) - - -
FY12/10. Kinsteel is confident about reporting better financial performance Var to C.EPS (%) -0.9 -10.0 -
in 1HFY12/10, as its 37.3%-owned Perwaja is bracing for a steep margin
expansion in 1HFY12/10 from the rising global steel price trend, given Share Price Chart
Perwaja’s relatively flat production cost curve in 1HFY12/10 (Perwaja has
already locked in iron ore pellets at low prices in anticipation of higher iron
ore prices going forward) and rising global steel prices. While the higher iron
ore pellet prices will increase Perwaja’s billet production cost (as iron ore
pellets acquired at cheap prices will run out by Jul 10), Perwaja feels that it
will still have an edge over the other upstream steel producers.

♦ Relocation of Gurun plants to take place in FY12/11. Kinsteel will

gradually relocate Perfect Channel’s production facilities (which produce wire
rod and channels) from Gurun to Kemaman (next to Perwaja’s steelmaking Relative Performance To FBM KLCI
plant) from FY12/11. Kinsteel projects that the relocation of these two
production facilities will result in an operating cost saving of RM35m per
Kinsteel
annum (translating to a payback period of 3 years), as the relocation will
result in lower transportation and energy cost.

♦ Risks. The risks include: (1) Oversupply in China that results in dumping
FBM KLCI
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 RM1.22 based on 12x FY12/10

fully-diluted EPS of 10.2 sen, in line with our 1-year target forward PER of 12x Chye Wen Fei
for the long steel product sector. Maintain Outperform. (603) 92802172
chye.wen.fei@rhb.com.my

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 10 March 2010

Visit Note

♦ Yet to see signs of a pick-up in demand for downstream steel products. YTD, Kinsteel has yet to see signs
of a pick-up in demand for downstream steel products (such as steel bars and wire rod), and Kinsteel attributes
this to a slow take-off in both public and private projects (4Q and 1Q are seasonally weaker on the back of
festivities and rainy season). However, Kinsteel feels that demand for downstream steel products will pick up
from 2HFY12/10, underpinned by:

1. The implementation of the remaining projects under the two stimulus packages;

2. Increased property development activities; and

3. More intense restocking activities by steel stockists ahead of the announcement of 10MP.

♦ Anticipating higher contribution from 37.3%-owned Perwaja from FY12/10. Despite the weak demand
for downstream steel products in 1HFY12/10, Kinsteel is confident about reporting better financial performance in
1HFY12/10, as its 37.3%-owned Perwaja bracing for a steep margin expansion in 1HFY12/10 from the rising
global steel price trend, given Perwaja’s relatively flat production cost curve in 1HFY12/10 (Perwaja has already
locked in iron ore pellets at low prices in anticipation of higher iron ore prices going forward) and rising global
steel prices. While the higher iron ore pellet prices will increase Perwaja’s billet production cost (as iron ore
pellets acquired at cheap prices will run out by Jul 10), 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.

♦ Relocation of Gurun plants to take place in FY12/11. Kinsteel will gradually relocate Perfect Channel’s (a
51%-owned subsidiary) production facilities (which produce wire rod and channels) from Gurun to Kemaman
(next to Perwaja’s steelmaking plant) from FY12/11 (and targeted to complete by early-FY12/12). For a start,
Kinsteel will first relocate the wire rod plant (the bread and butter of Perfect Channel) and the loss of output
during the relocation process will be made up by higher utilisation rate at Kinsteel’s new wire rod plant (that
currently produces mainly high-grade wire rod). Kinsteel projects that the relocation of these two production
facilities will result in an operating cost saving of RM35m per annum (translating to a payback period of 3 years),
as the relocation will result in:

1. Lower transportation cost, as Kinsteel currently incurs a transportation cost of RM15-20m per annum in
transporting billets from Kemaman to Gurun; and

2. Lower electricity cost. Upon the plant relocation, billets will be fed directly from steelmaking plant to rolling
mills, which is just next to the steelmaking plant and this results in shorter heating time.

Earnings forecasts

♦ Earnings forecast. Maintained. We note that our forecasts have yet to incorporate:

1. Operating cost savings arising from the relocation of Perfect Channel’s production facilities from Gurun to
Kemaman; and

2. 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. Indicative fair value is RM1.22 based on 12x FY12/10 fully-diluted EPS of 10.2 sen, in line with
our 1-year target forward PER of 12x for the long steel product sector. Maintain Outperform.

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 10 March 2010

Table 2: Earnings Forecasts Table 3: Forecast Assumptions

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

Turnover 1,928.1 1,546.5 2,049.2 2,062.3 Output (‘000 tonnes)

Turnover growth (%) -21.6 -19.8 32.5 0.6 DRI 1,450 1,450 1,450
Billets 1,200 1,200 1,200
EBITDA 140.2 498.3 530.6 524.5 Bars 400 400 400
EBITDA margin (%) 7.3 32.2 25.9 25.4 Wire Rod 100 100 100
Sections & Beams 200 200 200
Depreciation -111.9 -115.5 -114.8 -114.1 Source: RHBRI
Finance costs -126.4 -114.7 -110.0 -89.1

Pretax profit -98.1 268.0 305.8 321.4

Tax 42.8 -9.2 -17.8 -18.1
Minorities 73.6 -152.1 -165.0 -178.5
Net profit 18.3 106.8 123.0 124.9
EI -32.0 0.0 0.0 0.0
Core net profit -13.7 106.8 123.0 124.9
Source: RHBRI

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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