Iron Ores Cut 48 % by OSK

Net positive for Perwaja but nominal impact to Kinsteel. The settlement of new benchmark prices certainly represents an important milestone for HBI/DRI producers as it offers a clearer cost structure for the medium term. The settlement will provide some degree of comfort to both manufacturers and purchasers in committing their future orders. Although we prefer to take a prudent stance in our earnings estimates despite the latest development, we had earlier incorporated a potential earnings enhancement of RM63m from a possible 10% cut in pellet prices into Perwaja’s target price. With the currently high freight charges offsetting the potential cost saving from the additional 8% cut in pellet price, we maintain our TRADING BUY recommendation on Perwaja with our fair value retained at RM1.67. As Kinsteel owns a 37% stake in Perwaja, this potential earnings enhancement will definitely boost the company’s net earnings. Therefore, we have decided to solely incorporate the possible earnings from this development into Kinsteel’s fair value, which has been revised slightly upwards to RM0.64 but this still implies a significant downside risk of 37.1%. Thus we maintain our SELL recommendation.
Encouraging news for Lion Industries. The large cut in iron ore pellets price brings cheer to Lion Industries, which operates an 880,000-tonne per year (tpy) HBI plant. As we excluded the potential earnings enhancement of RM42m into the company’s valuation in our previous report, the latest development prompts us to raise our 12-month target price of Lion Industries to RM2.05 after incorporating the extra amount. We also maintain our BUY recommendation on the company, which is once again our TOP PICK for steel sector. Lion Industries’ 21%-owned associate, Lion Diversified, is also supposed to benefit from the lower pellet prices as it commissioned its 1.5m tpy DRI plant in Banting, Selangor around the middle of last year. The additional cost saving that is supposed to be shared with sister company Megasteel SB under the off-take agreement is also a timely life saver for the company as flat steel demand remains poor and may take a longer time to recover.