Ornasteel Holdings reported a good set of numbers for the first quarter of 2008 (1Q08). Net profit was up by about 5.7% year-on-year (y-o-y) to RM24 million — and was significantly higher than the RM15 million in 4Q07, where margins were affected by higher costs of production.
Operating margins in 1Q08 improved to 10.9% from 8.6% in 4Q07 and 9.9% in the previous corresponding quarter.
To minimise the risks of future pricing mismatch, Ornasteel has adopted a monthly pricing basis instead of the usual quarterly pricing basis. The move will help protect margins from further cost increases.
Additionally, demand for cold rolled coils (CRC) has strengthened in the last quarter. Sales for CRC enjoyed a strong 23% y-o-y growth to RM187.9 million, accounting for some 55% of total sales. This has helped pick up the slack in sales for galvanised steel (GI) and pre-painted galvanised steel (PPGI).
Demand for the building materials appears likely to decline further with the slowdown in property and construction projects. The shift in sales mix — CRC accounted for about 47% of sales in 2007 — also helped boost overall margins. Margins for CRC are much higher than those for GI and PPGI at roughly 10.4% and 4.7%, respectively in 1Q08.
Positively, Ornasteel’s close relationship with its controlling shareholder, China Steel Corp (CSC), gives the company a competitive edge. Ornasteel sources about 60% of its HRC requirements from CSC, including high-grade interstitial atom-free steel that is difficult to obtain in the open market.
The better quality raw material enables the company to produce higher grade CRC, the bulk of which are currently imported. In fact, about half of our country’s CRC consumption is currently imported, suggesting plenty of room for substitution.
Ornasteel has proposed to change its name to CSC Steel Holdings. The move will enable the company to capitalise on the established brand name of the Taiwan-based steel maker.
Fairly valued with higher-than-market average yields The stock is trading at about 6.7 times our estimated 2008 earnings, which is fairly consistent with the average valuations for steel stocks. Net tangible assets stood at RM1.88 per share. Given prevailing positive sentiment for the steel sector and Ornasteel’s higher-than-market average yields, its downside appears limited.
Ornasteel ’s share price is likely to be supported by its attractive dividend yield, which is among the highest given by listed steel companies.
It declared a gross final dividend of 12 sen per share for year ended Dec 31, 2007 (FY07), translating into a yield of 7.9% based on Friday’s closing price of RM1.53. The ex-date of the dividend falls on 26 June 2008 and payment is on July 11 2008.
Ornasteel’s balance sheet is in good shape. Net cash increased to RM75.4 million at end-1Q08 from RM53.8 million at end-2007. With minimal capital expenditure planned, its cash position should improve further.
Hence, shareholders could expect relatively generous dividend payouts in the current year
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