Steel stocks may benefit from the listing of Perwaja

On August 20th, we will see the listing of Perwaja Holdings Bhd ('Perwaja') on our Exchange. Perwaja is involved in the production of Direct Reduced Iron and semi-finished long steel products comprising blooms, billets and beam blanks. It is currently owned by Kinstel [51%]; Equal Concept Sdn Bhd ('ECSB') [44%]; and Maju Holdings Sdn Bhd ('Maju') [5%]. After the listing, their respective shareholdings will drop to 37.34%; 31.41%; and 4.46%.

Will Perwaja's listing boost the share prices of other steel producers? I think it may happen for two reasons. Firstly, the share prices of other steel producers have been beaten down very bad & may be due for a rebound. Secondly, the index of the US steel sector, DJUSST has posted fairly strong recovery in the past few days (see Chart 1 below). The listing of Perwaja could be the right catalyst for analysts & fund managers to re-look at this sector.


Chart 1: DJUSST's weekly chart as at July 31st (source: Stockcharts.com)

I can see three stocks which had corrected quite significantly & could be good candidates for a recovery play. They are Kinstel (a major shareholder of Perwaja), Masteel and SSteel.


Chart 2: Kinstel's daily chart as at July 31st (source: Quickcharts)



Chart 3: Masteel's daily chart as at July 31st (source: Quickcharts)



Chart 4: SSteel's daily chart as at July 31st (source: Quickcharts)

Masteel is especially attractive. It rose from a low of RM1.38 in April to hit a high of RM2.12 in May, before dropping back to a recent low of RM1.39. Today, Masteel has also just fixed the date for its 1-for-3 Bonus Issue yesterday. This has caused a jump in its share price to RM1.55 at the end of the morning session. I believe the Bonus Issue could be the right tonic to spark a recovery in the share price of Masteel.

A bit of a dampener here. You may ask how is Perwaja IPO price compared to AnnJo's current market price? I have calculated their last 4 quarters' results & made a comparison of their respective trailing PEs.

AnnJo’s Net Profit for the last 4 quarters up to 31/3/2008 amount to RM267.1 million. Based on its outstanding shares of 522.7 million (excluding warrant conversion), AnnJo’s Basic EPS is about 51 sen. Based on its share price as at 31/8/2008 of RM3.66, AnnJo is trading at a trailing PE of 7.2 times.

Perwaja’s Net Profit for the last 4 quarters up to 30/4/2008 amount to RM215.7 million. Based on its outstanding shares of 560.0 million after the IPO (but before ICULs coversion), Perwaja’s Basic EPS is about 38.5 sen. At its IPO price of RM2.90, Perwaja is trading at a trailing PE of 7.5 times.

As such, Perwaja share price would probably open at about the same price as AnnJo.