RHB cuts Southern Steel’s earnings forecast on power rate hike

Business & Markets 2013
Written by Zatil Husna of theedgemalaysia.com
Tuesday, 03 December 2013 11:51
A + A - Reset
KUALA LUMPUR: RHB research has cut its earnings forecasts and lowered its
fair value (FV) on Southern Steel Bhd (SSB) due to the higher electricity tariff
announced by Tenaga Nasional Bhd (TNB) yesterday.
The research firm has cut the group’s FY14 and FY15 estimates by 30% and
53.6% respectively, following an 18.8% increase in electricity tariff.
It has trimmed SSB’s fair value to RM1.57 from RM1.61, while reiterating
‘neutral’ call on the stock.
The research firm noted that SBB’s electricity cost makes up about 10% of its
production cost, adding that it falls under the “special industrial tariff” group
under the latest hike in electricity tariffs.
Southern Steel (SBB) operates an electrical arch furnace (EAF) that consumes
some 600 kWhr of electricity to produce a tonne of billets and 110-150 kWhr to
manufacture a tonne of bars or wire rods from billets.
“The untimely tariff revision is also likely to delay the company’s new strip mill
from making a significant contribution. Thus, we maintain our NEUTRAL rating
on SBB, with our FV trimmed slightly to RM1.57.
“As such, we remain NEUTRAL on SBB, with our FV trimmed slightly to
RM1.57 (from RM1.61),” it said in a note today.
“As SBB is in the midst of installing a new hot strip mill at its Prai plant, the
electricity tariff hike announced yesterday would certainly delay the new plant
from making significant contribution to the company, especially since this mill is
the first of its kind in the country.
“’We have not incorporated the mill’s potential contribution into our estimates, as disclosure on this project is limited and its initial
contribution may be marginal.
“However, we are prompted to slash our FY14/FY15 estimates by 30%/53.6% based on the latest electricity tariff increase from Jan 1,
2014 and its potential impact on SBB’s existing long steel capacity,” said RHB.