KLCI - steel sector

Wednesday December 31, 2008
‘Overweight’ call for steel sector on cheap valuations
By EDY SARIF and LEE KIAN SEONG


PETALING JAYA: OSK Investment Bank Research has maintained its “overweight” call on the steel sector going into 2009 due to the cheap valuations of steel stocks and their oversold positions.

OSK said the “real demand for steel products were expected to recover gradually in the next few months on domestic and international pump priming.”

“With their manageable gearing levels, we do not expect the local mills to experience a credit crunch at least in the medium term,” said analyst Ng Sem Guan.

However, the research house said it had “toned down” their fair values based on “new earnings estimates and parameters.”

“We keep our ‘buy’ recommendation on Lion Industries, (at target price of RM1.86); Southern Steel, (RM2.24) and Malaysia Steel Works, (Masteel) (RM1.08),” OSK said in its Investment Strategy 2009 report. It also recommended a “trading buy” for Ann Joo (RM1.54); and Kinsteel, (64sen).

Ng said the sluggish demand over the last three months had led to a buildup in inventory but noted that most of the mills had taken measures to trim production by 20% to 50% in the near future to pare down the inventory.

He projected “some inventory write-downs” following the sharp plunge in average selling prices and acknowledged that some steel mills might register a loss in the forth quarter due to sluggish demand and weak selling price.

“Although the losses could possibly extend into the following quarter should average selling prices weaken further, we expect both demand and average selling prices to recover gradually,” he said.