KUALA LUMPUR: Hwang DBS Vickers Research raised Kinsteel Bhd's FY10-11F earnings on stronger sales and margin recovery, but cut FY09F profit on weaker than expected margin recovery in 4Q09.

It said on Friday, Jan 29 it maintained Buy and RM1.30 TP (based on 1.3 times NTA) as Kinsteel expanded upstream capacity in anticipation of stronger demand for DRI and billets.

"Expanding upstream capacity by 40%-50%. 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," it said.

Kinsteel has three to four months iron ore inventory to sustain its production. Scrap is trading at US$380 to US$400 a tonne (+38% since Dec 2009); to counter rising scrap costs, Kinsteel is using less scrap and more DRI (US$250 to US$280 a tonne).

Local prices of bars and rods averaged RM2,000 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.

"Raised FY10-11 earnings. This is premised on the planned upstream capacity expansion, thus raising production and earnings, especially in FY11. We cut FY09 earnings by 79% following weaker than expected margin recovery in 4Q09 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," it said.