Hwang DBS Vickers Research raised Kinsteel Bhd's FY 2010-11 earnings on stronger sales and margin recovery, but cut FY 2009 profit on weaker than expected margin recovery in Q4 of 2009.

Hwang DBS Vickers Research said that it maintained Buy and MYR 1.30 as Kinsteel expanded upstream capacity in anticipation of stronger demand for DRI and billets.

It added that "Expanding upstream capacity by 40% to 0%. Kinsteel’s capacity utilization for upstream production had been close to 100% since June 2009. And given stronger demand for upstream products, 37% owned Perwaja plans to expand its DRI capacity from 1.5 million tonnes currently to 2.1 million tonnes by December 2010."

Kinsteel has three to four months iron ore inventory to sustain its production. Scrap is trading at USD 380 to USD 400 a tonne to counter rising scrap costs. Kinsteel is using less scrap and more DRI.

Local prices of bars and rods averaged MYR 2,000 a tonne, which should be sustainable given the upward trends in iron ore and scrap prices. Hence, we expect Kinsteel to record stronger profits ahead, premised on improved demand and price outlook.

Hwang DBS said that "Raised FY 2010-11 earnings. This is premised on the planned upstream capacity expansion, thus raising production and earnings, especially in FY 2011. We cut FY 2009 earnings by 79% following weaker than expected margin recovery in Q4of 2009 due to temporary weakness in steel prices in the quarter and seasonally slow December month. Maintain Buy on Kinsteel on the back of earnings recovery."

(Sourced from www.theedgemalaysia.com)