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Monday May 12, 2008 MYT 11:59:57 AM

OSK Research sees ‘super cycle’ for steel for next 1-2 years


KUALA LUMPUR: OSK Investment Research is “ultra bullish” on the steel sector as it continues to believe Malaysia’s long steel sector is in the “most favourable” environment, especially after the Government scrapped curbs on the steel products.

In its report released Monday it reiterated a “super cycle” for next one to two years. The scrapping of ceiling prices for steel bars and billets should enhance the transparency issues that have been plaguing the industry for some time.

“Though the liberalisation on imports and exports may not have any major impact to local millers’ domestic market share, the liberalisation of exports should be positive for our local steel manufacturers to capitalise on current regional shortage by increasing the export of billets,” it said.

OSK Research said both Southern Steel and Ann Joo had announced resounding January-March results last week. It believed other steel mills are likely to record inspiring figures scheduled by end-May hence further potential earnings upgrade.

“Apart from that, steel millers’ profit margins are set to improve further in the coming quarters due to the two month delivery lag. Nonetheless, such a trend is unlikely to sustain as part of these variances are due to timing differences between the cheaper raw materials against higher selling prices,” it said.

OSK Research said most millers might see margins and earnings contraction by FY09 unless steel prices continue to escalate in the next few months or if there are more room for production expansion or cost saving from efficiency improvement.

“We are in the midst of reviewing our earnings projection for the rest of the long steel companies under our universe and are likely to revise up their respective fair value upon announcement of the January-March numbers,” it said,” it said.

OSK Research said overall all steel stocks are still trading at attractive single digit PER on FY09 numbers despite the positive developments.

By incorporating a higher valuation parameter of 10 times steel sector price-to-earnings ratio (PER) on FY09 earnings, it continued to pick Lion Industries Corporation (Target Price: RM5.15) as its top pick.

It also reiterated its buy recommendations on the rest of the integrated long steel players namely Ann Joo Resources (TP: RM6.00), Southern Steel (TP: RM4.90), Malaysia Steel Works (KL) (TP: RM2.81) and Kinsteel (TP:RM1.63).

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