Perwaja Holdings Bhd (Feb 8, 78.5 sen)
Maintain buy with fair value RM1.65: The Edge weekly reported over the weekend that Malaysian Rating Corp Bhd (MARC) had lowered its rating on Perwaja Steel Sdn Bhd’s RM400 million Murabahah medium-term notes (MMTN) programme from AID to A-ID. The rating action affected RM160 million in outstanding notes under the programme, while the outlook on the rating was negative.
MARC said the rating action was due to the steelmaker’s prolonged decline in its operating performance. Given Perwaja’s reported losses for two consecutive years plus the poor 9MFY11 results thus far, the downgrade came as no surprise.
We highlighted in our recent updates that the basic fundamentals underlying steel mills in Malaysia remain weak, but various mega projects under the Economic Transformation Programme (ETP) may spur long steel demand despite execution risks.
While the industry’s poor outlook will persist, Perwaja is building an iron pelletising plant that is expected to boost the profitability of its direct reduction plant.
This would allow it to meet its own iron ore pellet needs, which are currently procured at a hefty premium to iron ore fines.
We see the new iron processing plant producing 400,000 tonnes of iron ore pellets in FY12 and achieving a total savings of US$50 (RM150) a tonne from the procurement of local iron ore, logistical benefits, in-house value-adding activities and utilisation of tax credits on accumulated losses.
Undeniably, iron ore mining in Malaysia is lucrative as the production cost is likely to be below US$50 a tonne compared with the international selling price of above US$140.
The news on the Terengganu government meeting Perwaja’s request to mine iron ore in Bukit Besi is not entirely unexpected as this was first announced by its mentri besar during Perwaja’s ground-breaking ceremony in July 2011, which kicked off the construction of its pelletisation and concentration plant.
Furthermore, the MB reiterated last December that the state government “has given an area at Bukit Besi”, which represented a firmer commitment on its part to allocate a portion of the mining area to Perwaja, as the MB had previously only indicated that the state government was “ready to consent” to the company’s request to mine iron ore in Bukit Besi. The tone of the MB’s remarks suggests that the “official” award is imminent and an agreement could be sealed anytime soon.
Aside from the ongoing transformation, Perwaja is in the process of completing its proposed redeemable convertible unsecured loan stocks (RCULS) with free detachable warrants, both on the basis of one-for-two.
Following some delay, the next key date is the ex-date for the entitlement, which may be fixed in the next few weeks, as the warrants are scheduled to start trading by the end of this month. We like the deal as the RCULS not taken up by minority shareholders will be subscribed by its main shareholder, Kinsteel Bhd. In addition, the detachable nature of the warrants will allow all minority shareholders to enjoy the free warrants.
We remain upbeat on Perwaja despite the rating downgrade by MARC. We believe equity investors should keep a close eye on the ongoing transformation efforts implemented by the management as: (i) the commissioning of the pelletisation and concentration plant in 2012 is likely to translate into significant cost saving of up to US$50 a tonne for its upstream material; and (ii) the award of the mining concession in Terengganu may also translate into a blue-sky discounted cash flow valuation of RM2.65 per share.
That aside, we also like the company’s impending corporate proposal to raise cash via the issuance of RCULS as they come with free detachable warrants on the basis of one-for-two, which is set to reward minority shareholders.
We maintain our “buy” recommendation on Perwaja and its fair value at RM1.65. — OSK Research, Feb 8
This article appeared in The Edge Financial Daily, February 9, 2012.
Maintain buy with fair value RM1.65: The Edge weekly reported over the weekend that Malaysian Rating Corp Bhd (MARC) had lowered its rating on Perwaja Steel Sdn Bhd’s RM400 million Murabahah medium-term notes (MMTN) programme from AID to A-ID. The rating action affected RM160 million in outstanding notes under the programme, while the outlook on the rating was negative.
MARC said the rating action was due to the steelmaker’s prolonged decline in its operating performance. Given Perwaja’s reported losses for two consecutive years plus the poor 9MFY11 results thus far, the downgrade came as no surprise.
We highlighted in our recent updates that the basic fundamentals underlying steel mills in Malaysia remain weak, but various mega projects under the Economic Transformation Programme (ETP) may spur long steel demand despite execution risks.
While the industry’s poor outlook will persist, Perwaja is building an iron pelletising plant that is expected to boost the profitability of its direct reduction plant.
This would allow it to meet its own iron ore pellet needs, which are currently procured at a hefty premium to iron ore fines.
We see the new iron processing plant producing 400,000 tonnes of iron ore pellets in FY12 and achieving a total savings of US$50 (RM150) a tonne from the procurement of local iron ore, logistical benefits, in-house value-adding activities and utilisation of tax credits on accumulated losses.
Undeniably, iron ore mining in Malaysia is lucrative as the production cost is likely to be below US$50 a tonne compared with the international selling price of above US$140.
The news on the Terengganu government meeting Perwaja’s request to mine iron ore in Bukit Besi is not entirely unexpected as this was first announced by its mentri besar during Perwaja’s ground-breaking ceremony in July 2011, which kicked off the construction of its pelletisation and concentration plant.
Furthermore, the MB reiterated last December that the state government “has given an area at Bukit Besi”, which represented a firmer commitment on its part to allocate a portion of the mining area to Perwaja, as the MB had previously only indicated that the state government was “ready to consent” to the company’s request to mine iron ore in Bukit Besi. The tone of the MB’s remarks suggests that the “official” award is imminent and an agreement could be sealed anytime soon.
Aside from the ongoing transformation, Perwaja is in the process of completing its proposed redeemable convertible unsecured loan stocks (RCULS) with free detachable warrants, both on the basis of one-for-two.
Following some delay, the next key date is the ex-date for the entitlement, which may be fixed in the next few weeks, as the warrants are scheduled to start trading by the end of this month. We like the deal as the RCULS not taken up by minority shareholders will be subscribed by its main shareholder, Kinsteel Bhd. In addition, the detachable nature of the warrants will allow all minority shareholders to enjoy the free warrants.
We remain upbeat on Perwaja despite the rating downgrade by MARC. We believe equity investors should keep a close eye on the ongoing transformation efforts implemented by the management as: (i) the commissioning of the pelletisation and concentration plant in 2012 is likely to translate into significant cost saving of up to US$50 a tonne for its upstream material; and (ii) the award of the mining concession in Terengganu may also translate into a blue-sky discounted cash flow valuation of RM2.65 per share.
That aside, we also like the company’s impending corporate proposal to raise cash via the issuance of RCULS as they come with free detachable warrants on the basis of one-for-two, which is set to reward minority shareholders.
We maintain our “buy” recommendation on Perwaja and its fair value at RM1.65. — OSK Research, Feb 8
This article appeared in The Edge Financial Daily, February 9, 2012.
