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Southern Steel

Recommendation: BUY
Stock Code: 5665 Bloomberg: SSB MK Price: MYR2.04 12-Month Target Price: MYR2.45 Date: August 18, 2010

Board: Main Pr ice 30 Day Moving Aver age Pr ice ( MYR)


4.00
Sector: Industrial Products 3.50

GICS: Materials/Steel 3.00

Market Value - Total: MYR855.6 mln 2.50

2.00

Summary: Southern Steel Berhad (Southern Steel) is 1.50

Malaysia’s largest producer of steel bars and wire rods with a 1.00
combined annual production capacity of 1.3 mln tonnes per
annum (tpa). The group also has billet production capabilities Vol ume Vol ('000)

of up to 1.3 mln tpa and a 0.5 mln tpa of rolling capacity. The 3,000

stock is a component of FBM EMAS. 2,000

1,000

Analyst: Su Peng Ng 0
Aug 07 Oct 07 Dec 07 Mar 08 May 08 Jul 08 Sep 08 Dec 08 Feb 09 Apr 09 Jun 09 Aug 09 Nov 09 Jan 10 Mar 10 May 10 Aug 10

Results Review & Earnings Outlook Recommendation & Investment Risks

• Southern Steel’s 1H10 results were above expectations when net • We maintain our Buy call on Southern Steel with a higher 12-month
profit of MYR89.1 mln accounted for 74% of our previous 2010 target price of MYR2.45 (from MYR2.35) after increasing our 2010
estimate, after achieving higher-than-estimated margins. earnings estimate.

• 1H10 revenue surged 49% YoY on the back of higher sales volume as • Our target price is derived after ascribing a target PER multiple of 7x
well as average selling price (ASP), as 1H09’s performance was (from 8x) against our estimated 2010 EPS plus our estimated 2010 net
affected by the global crisis. DPS of 6.3 sen. Our target multiple is within peer and historical
averages but is lowered to reflect the uncertainty over the timing of
• 2Q10 revenue also rose 9% QoQ mainly due to improved ASP. At the large domestic infrastructure projects.
same time, Southern Steel’s operating margin improved to 9.7% from
6.6% in 1Q10 as raw material (steel scrap) prices lagged ASP. • The mandatory takeover offer for Southern Steel (cash offer price of
MYR2.05) by Signaland Sdn Bhd is still on-going. We believe
• We look for a poorer 2H10 given the fasting month and monsoon shareholders may garner better returns if they continue to hold the
season. We only expect large domestic infrastructure projects to be stock, especially when large domestic projects are rolled out over the
rolled out from the end of 1Q11 onwards. We adjust our margin next 12 months. However, the cash offer may limit share price
assumption to reflect strong 1H10 results, thereby lifting our 2010- performance in the near term.
2011 net earnings estimates to MYR145.4 mln (from MYR119.6 mln)
and MYR160.6 mln (from MYR132.8 mln), respectively. • Risks to our recommendation and target price include volatile steel and
raw material prices arising from uncertainties in the global environment
• Southern Steel also declared an interim dividend of 5% (or MYR0.05 and slower-than-expected rollout of large domestic infrastructure
per share), which translates into a yield of 2.5%. projects.

Key Stock Statistics Per Share Data


FY Dec. 2009 2010E FY Dec. 2007 2008 2009 2010E
Reported EPS (sen) 3.9 34.7 Book Value (MYR) 1.77 1.81 1.80 2.08
PER (x) 52.8 5.9 Cash Flow (sen) 67.7 44.0 24.2 56.3
Dividend/Share (sen) 5.0 7.5 Reported Earnings (sen) 48.0 25.0 3.9 34.7
NTA/Share (MYR) 1.68 1.96 Dividend (sen) 7.5 12.5 5.0 7.5
Book Value/Share (MYR) 1.80 2.08 Payout Ratio (%) 15.6 10.6 113.2 18.0
No. of Outstanding Shares (mln) 419.4 PER (x) 4.2 8.2 52.8 5.9
52-week Share Price Range (MYR) 1.60 - 2.66 P/Cash Flow (x) 3.0 4.6 8.4 3.6
Major Shareholders: % P/Book Value (x) 1.2 1.1 1.1 1.0
Hume Industries (Malaysia) Berhad 41.5 Dividend Yield (%) 3.7 6.1 2.5 3.7
Signaland Sdn Bhd 27.0 ROE (%) 28.8 67.6 2.1 17.9
Southern Amalgamated Co 7.8 Net Gearing (%) 104.0 110.3 96.8 75.9
* Stock deemed Shariah compliant by the Securities Commission

All required disclosures and analyst certification appear on the last two pages of this report. Additional information is available upon request.
Redistribution or reproduction is prohibited without written permission. Copyright © 2010 The McGraw-Hill Companies, Inc. Page 1 of 4
Southern Steel
Recommendation: BUY
Stock Code: 5665 Bloomberg: SSB MK Price: MYR2.04 12-Month Target Price: MYR2.45 Date: August 18, 2010

Quarterly Performance
FY Dec. / MYR mln 2Q10 2Q09 % Change
Reported Revenue 684.6 488.4 40.2
Reported Operating Profit 66.4 -12.8 NM
Depreciation & Amortization NA NA NA
Net Interest Income / (Expense) -5.6 -4.9 14.6
Reported Pre-tax Profit 62.3 -16.9 NM
Reported Net Profit 54.6 -12.7 NM
Reported Operating Margin (%) 9.7 -2.6 -
Reported Pre-tax Margin (%) 9.1 -3.5 -
Reported Net Margin (%) 8.0 -2.6 -
Source: Company data

Profit & Loss


FY Dec. / MYR mln 2008 2009 2010E 2011E
Reported Revenue 3,222.4 2,032.5 2,408.3 2,598.0
Reported Operating Profit 532.9 29.3 189.0 204.0
Depreciation & Amortization -73.9 -78.4 -82.9 -86.5
Net Interest Income / (Expense) -38.4 -22.5 -29.5 -27.5
Reported Pre-tax Profit 106.5 8.8 161.5 178.5
Effective Tax Rate (%) 3.7 NM 10.0 10.0
Reported Net Profit 104.7 16.2 145.4 160.6
Reported Operating Margin (%) 16.5 1.4 7.8 7.9
Reported Pre-tax Margin (%) 3.3 0.4 6.7 6.9
Reported Net Margin (%) 3.2 0.8 6.0 6.2
Source: Company data, S&P Equity Research

All required disclosures and analyst certification appear on the last two pages of this report. Additional information is available upon request.
Redistribution or reproduction is prohibited without written permission. Copyright © 2010 The McGraw-Hill Companies, Inc. Page 2 of 4
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Recommendation and Target Price History P rice (M YR)


Date Recommendation Target Price 4.0
New Buy 2.45
19-Jul-10 Buy 2.35
3.5
22-Jan-10 Buy 2.85
7-Aug-09 Strong Buy 2.30
7-May-09 Buy 1.90 3.0
20-Feb-09 Hold 1.60
10-Nov-08 Hold 1.50 2.5
19-Aug-08 Buy 3.80
27-May-08 Buy 4.00
2.0

1.5

1.0
Aug 07 Nov 07 Feb 08 May 08 Aug 08 Nov 08 Feb 09 May 09 Aug 09 Nov 09 Feb 10 May 10 Aug 10

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