Kinsteel ------------- BUY

3Q09 Results Below Expectations

Kinsteel’s 3Q09 results were below expectations, largely on the back of lowerthan- expected volume sales. Nevertheless, what is positive is that with higher steel prices and lower production cost, Perwaja (PERH MK, MYR1.36, Not Ranked) and the group as a whole, returned to the black after three consecutive quarters of losses.

Billet prices rose an average of 5%-8% QoQ in 3Q09. Nevertheless, group revenue declined 28% QoQ on the back of lower sales volume, likely due to the slow pickup in domestic infrastructure projects.

Operationally, however, the group turned around to profit on the back of lower production costs, with an increase in the utilization of cheaper DRI as opposed to scrap metal, as its primary raw material.

Perwaja reported a net profit of MYR13.1 mln in 3Q09 vs. a loss of MYR84.9 mln in 2Q09. Cumulatively, however, the group continues to be in the red, with a total loss of MYR128.3 mln for 9M09.

Taking into account a more moderate recovery in selling prices and sales, we reduce our 2009 net profit estimate to MYR10.3 mln (from MYR24.4 mln) and our 2010 net profit estimate to MYR112.3 mln (vs. MYR128 mln).

Recommendation & risk

We maintain our Buy recommendation on Kinsteel with an unchanged 12-month target price of MYR1.10.

We continue to utilize a blend of PER and P/B multiples to value Kinsteel. Our target multiples are unchanged at 11x PER and 1x P/B, but are rolled forward and applied to our estimated 2011 EPS (2010 previously).

Our calculations are fully diluted after taking into account Kinsteel’s outstanding warrants (exercise price at MYR0.20), which will expire on Nov. 11, 2011. The target PER and P/B multiples are benchmarked to peer and historical averages. We continue to expect a better outlook for the industry, as we believe support for higher demand and selling prices will come from more infrastructure projects being rolled out. We also expect Kinsteel’s 2010 earnings to get a lift from plans to modernize and expand its facilities by mid-2010.

Risks to our recommendation and target price include slower-than-expected demand, higher-than-expected raw material costs and volatility in international steel prices.