Kinsteel to ride on stellar export demand especially from Vietnam

Kinsteel Bhd (Kinsteel) is expected to ride on stellar growing demand from export markets especially in Vietnam.Furthermore, the group will also benefit from the rebounding domestic construction demand in the second half of this year.

Maybank Investment Bhd (Maybank) stated in its research report yesterday that the Asean-origin billets were fetching higher average selling prices in Vietnam due to preferential lower import duties within the region.

Due to the scheduled maintenance shutdown of its direct reduced iron (DRI) plant in February, sales volume in the first quarter of 2010 was flat quarter-on-quarter (q-o-q).

However, Kinsteel was expecting to reach 100 per cent utilisation by the end of 2010 after ramping up its DRI capacity expansion to 1.8 million metric tonnes.

As for its billet-making capacity, capital expenditure of RM100 million had been planned for reactivating one of its three idle Electric Arc Furnaces (EAFs). Renewed capacity would come on stream by the end of 2010.

This would increase the total capacity to two million metric tonnes or equivalent to 54 per cent.

The research house opined that the current rising margin environment would offset any possibility of gas hikes. However, it predicted that a 10 per cent increase in gas costs would reduce Kinsteel’s earning per share by five per cent.

Gas price hikes were supposed to be reviewed biannually by the Economic Planning Unit (EPU) from the last revision in February 2009. Since the government had not carried out its subsidy removal plans, the possibility of gas hikes was not ruled out.

With three-month iron ore inventory in hand, Kinsteel was expected not to commit to the second quarter of 2010 iron ore contract. Management might consider sourcing iron ore from domestic reserves in Pahang, Terengganu and Kelantan where pricing could be more favourable.

The research house revealed that Malaysia had at least 50 million metric tonnes of iron ore reserves. With Perwaja Holdings Bhd consuming two million metric tonnes per annum, margins would be preserved for longer.

Reporting the performance of the group, the share price fell 12 per cent from its peak in January this year making Kinsteel the worst performing stock on a 6-month basis.

However, the shares were offering a better risk-reward ratio now on higher steel prices, positive global steel fundamentals, and low foreign shareholding of less than 10 per cent.

Furthermore, the visit to Kinsteel’s 37 per cent owned Perwaja steel plant with foreign fund managers was well received.

Moreover, the research house turned positive on Kinsteel as its April-May 2010 billet deliveries were sold forward at US$550 per metric tonnes versus US$600 per metric tonnes currently.

Its current iron ore inventory, which was sufficient till June 2010, was procured at an average price of US$110 per metric tonne versus the quarterly contract of US$200 per metric tonne for the second quarter of 2010.

The resulting margin expansion will be more than sufficient to compensate for a potential gas price hike.

As a result, the research house upgraded the target price for the group from RM1.03 to RM1.23 reflecting the latest steel prices and iron ore input costs. The earning per share for 2010 was raised by 13 per cent.

Tags: Kinsteel, Vietnam steel industry