Hot Stock Kinsteel extends gains, more mining deals seen

Hot Stock Kinsteel extends gains, more mining deals seen
Business & Markets 2013
Written by Kamarul Anwar of theedgemalaysia.com  
Thursday, 25 July 2013 15:16

KUALA LUMPUR (July 25): Investors are still buoyant on loss-making KINSTEEL BHD []’s prospects of making a comeback. There has been market talk that the steel maker will get more mining rights after obtaining one from the Sultan of Pahang.

At 2:31pm, Kinsteel added 3.5 sen or 11.48% to 34 sen. Placed number four on the bourse's most-active list, a total of 27.696 million shares were traded.

The surge in the stock began yesterday after it announced that it had signed a mining agreement with Sultan Ahmad Shah of Pahang for the exclusive right to carry out mining operations for all types of iron ore and other minerals in the district of Kuala Lipis.

Kinsteel was traded higher by as much as five sen or 18.18% to 32.5 sen before closing at 30.5 sen.

Analysts said there have been rumours that the steel producer could clinch more mining deals. They said this could be due to the company’s strong ties with the government.

But Kinsteel's credit profile is also closely watched. Maybank Investment Bank which downgraded Kinsteel to a “hold” from "buy", and slashed its target price for the stock to 26 sen, from 58 sen, said "it remains to be seen" if Kinsteel will be able to fulfill its debt obligations.

“We think its cash-strapped situation will cap upside (to the stock's price),” said Maybank analyst Lee Yen Ling in a note yesterday.

While Lee said the research house is positive on Kinsteel’s mining deal in Pahang, it is unable to assess the incremental value to the firm as details on the award are scant.

“Key risks include a potential equity-raising exercise, via placement of new shares or a rights issuance, in view of the capital expenditure required for the mining activity and the need to refinance its current borrowings,” said Lee.

However, the analyst stated that there is “long-term value in mine”.

“In addition to selling iron ore to third parties (potentially the export market), Kinsteel could also reap the benefit of this relatively cheaper local iron ore by consuming it internally versus importing, which would lead to a much better cost structure.

"However, this will only materialise when its subsidiary Perwaja Holdings Bhd’s pelletising plant comes on-stream in the second quarter of next year,” Lee said.