OSK Claims Offer For Southern Steel Is Reasonable

Oh gawd!

On today's Star Business: Hong Leong founder Quek believed to be buying Southern Steel

• ..... However, OSK Research analyst Ng Sem Guan views the offer as a reasonable one but suspects that long-term investors such as SSB co-founder Datuk Dr Tan Tat Wai, who collectively owns 7.9% in the company, may deem the offer price too low and are unlikely to accept the offer.
  
  He said the offer price represented a 5.7% premium to OSK’s original target price of RM1.94 and suggested that investors, especially those with a short-term investment horizon, accept the offer or dispose of the shares in the open market.
  
  Ng does not expect an upward revision to the offer price.
  
  He added that the further acquisition of SSB by Quek came as a surprise.
  
  “We had earlier thought his recent privatisation of Hume Industries may suggest a possible exit from the steel business as it gave him the flexibility to make a disposal at the right pricing and realise a huge pile of cash,” he said in a note.
  
  In a statement to Bursa Malaysia on Friday, the offeror said it intended to keep SSB listed if its shareholding level together with PAC rose above the 75% threshold but remained less than 90% after the offer lapsed.

Huh?

OSK's target price for Southern Steel is 1.94?????

I am truly baffled? How does OSK changes target prices so fast like that? How could a company's value swing from 2.04 to 3.04 to 1.94 in less than one year? Yeah eight months to be precise!

As mentioned in the posting, Southern Steel Privatisation Offer

• I was left baffled. How, where, when and why did OSK suddenly make its decision to change it's target price from rm 2.12 to rm 3.04? (huhu... that's a 43% increase in target price hor. From Nov to Jan.. can the valuation of a company suddenly increase by a whopping 43%???? Well, apparently in OSK stock recommendation universe it can!)

From Nov 2009 to Jan 2010, target price went from rm 2.12 to rm 3.04. Best of all, one of the MAIN REASON and justification given was that Southern Steel could be a potential M&A target play!

OSK now claims its target price is only 1.94.

But if it did... it's even more incredible!

Let's see...

Nov 2009 target price 2.12
Jan 2010 target price 3.04
Current target price 1.94!!!

huhu!

Now since OSK covered Southern Steel under Bursa CBRS scheme, I decided to do a quick search.Here's my search results. Only 2 hits!

1. March 2010: Southern Steel: A Pleasant Surprise ( BUY: Target Price 3.04)
2. May 2010: Southern Steel: Alert on Medium Term Outlook (HOLD: Target Price 2.50)!!!

huhu!

In May 2010, OSK gave it a target price of rm2.50!

They now claim muted M&A excitement! And that Southern Steel is falling below estimates! (Now GLEE! (yeah I used it.. that four letter word. :P), the higher than normal estimates were assigned by yourself initially. So you cannot blame Southern Steel to be falling below estimates can you?)

huhu!

How?

From a CBRS user perspective. ( Let's assume one is. )

So OSK Research covers Southern Steel under Bursa CBRS Research reports.

November 2009, it says BUY with target price 2.12. link to research report on Bursa website

It then went on made a huge upgrade on Southern Steel's Target Price on 20th Jan 2010 report but that report was not loaded in Bursa website!

From 2.12 to 3.04, big upgrade yes? Important? And you think OSK would have shown the CBRS users some respect by loading that said report!

March 2010, all the CBRS user sees is Southern Steel target price is suddenly changed to 3.04.

So how could the investor know that OSK had made such an incredible alteration with its Target Price recommendation for Southern Steel.

And then on May 2010, OSK downgraded Southern Steel to a HOLD with a target price of 2.50.

The same analysts now appears in the media and claims his target price is only 1.94! How? Why wasn't the report loaded into Bursa CBRS??? Why not???

And he claims that the offer price of 2.05 for Southern Steel to be reasonable!

Why?

Cos the offer price represented a 5.7% premium to OSK’s original target price of RM1.94!!!

huhu!

What EXACTLY is his meaning of OSK original target price of 1.94??

ORIGINAL TARGET PRICE OF 1.94????????

ORIGINAL TARGET PRICE OF 1.94????????

ORIGINAL TARGET PRICE OF 1.94????????

ORIGINAL TARGET PRICE OF 1.94????????

!!!!!

What's the recent target prices?????

Nov 2009, it was 2.12
Jan 2010, it was 3.04
May 2010, it was 2.50
Jul 2010, it is NOW 1.94

Who in Jan 2010 said the following:

• "We think Southern Steel may easily carry a price tag of above RM3 per share at 8.0 times normalised earnings if a major block is offered to the market. This, together with the good results and a more promising 1H, prompts us to maintain our BUY recommendation with 12-month target price of RM3.04," it said.

Well apparently in OSK Stock universe, anything and anyhow also..... CAN!

Southern Steel Privatisation Offer

The last two postings on Southern Steel was..

1. 7 May 2009: A Quick Look At Southern Steel And The Steel Sector
2. 12 Nov 2009: Southern Steel Swings Back To Profit

On 13th Nov 2009: on Bursa CBRS, we can see the following report: SOUTHERN STEEL BERHAD (clickable link on the name SOUTHERN STEEL to Bursa CBRS website or via the search link on the key phrase 'Southern Steel' from 12 Nov 2009 to present day.

• As Southern Steel’s 3Q results came in lower than expected and its 4Q performance is hinged on developments in the China market, we are expect a minor loss for FY09. Nonetheless, we are hopeful for FY10 as stimulus packages around the world serve to drive steel demand. The rich market liquidity is also prompting investors to turn their attention to high beta steel stocks, which justifies our BUY recommendation. We are tagging our 12-month target price at RM2.12.
  

Now on 22nd Jan 2010, OSK Research had the following comments on SSteel. (Strange this article did NOT appear from my search via Bursa CBRS! I wonder why! :P)

I am baffled. The target price os not rm 3.04. November's target price was only rm 2.12! (you can also read the same thing from the edge malaysia: OSK Research maintains Buy on Southern Steel at RM2.39

• It said on Friday, Jan 22 Southern Steel’s 4Q results were a pleasant surprise to the research house and the market. Apart from being impressed with good showing, it was generally bullish on the steel price and demand outlook for 1HFY10.
  
  "This together with the possibility of the company being a potential M&A candidate post-privatisation of Hume Industries, we maintain our BUY recommendation with a target price of RM3.04. The fair value is derived from a blended valuation of 9.0 times PER and 1.17x NTA per share on FY10 numbers," it said.
  
  OSK Research said it was looking at a potential M&A for Southern Steel. The company, 42%-owned by Hume Industries, is currently under-going a Voluntary
  General Offer by its major shareholder, Tan Sri Quek, to take the holding company private.
  
  "We suspect the privatization of Hume may give the ultimate shareholder the flexibility to exit the steel business at the right pricing. Tata Steel, which is the company’s second major shareholder, is the prime candidate as an interested party.
  
  "We think Southern Steel may easily carry a price tag of above RM3 per share at 8.0 times normalised earnings if a major block is offered to the market. This, together with the good results and a more promising 1H, prompts us to maintain our BUY recommendation with 12-month target price of RM3.04," it said.

I was left baffled. How, where, when and why did OSK suddenly make its decision to change it's target price from rm 2.12 to rm 3.04? (huhu... that's a 43% increase in target price hor. From Nov to Jan.. can the valuation of a company suddenly increase by a whopping 43%???? Well, apparently in OSK stock recommendation universe it can!)

Ah... but then I found it... on 20th Jan 2010, OSK had a long, long report on the steel sector. LOL! Since the report is long (29 pages), needless to say, the target prices are long too. LOL! :P

On page 27 of the report,

Ah..... there.... that was their reasoning. It was a potential M&A target.

On Friday evening, Southern Steel Berhad (“SSB” or the “Company”) Receipt of Notice of Unconditional Take-over Offer

• The Board of Directors of the Company (“Board”) wishes to announce that the Company has today received a notice of conditional take-over offer (“Notice”) from Hong Leong Investment Bank Berhad, on behalf of Signaland Sdn Bhd (“Offeror”) on the Offeror’s obligation to acquire all the ordinary shares of RM1.00 each in SSB which are not owned by the Offeror and the persons acting in concert with the Offeror (“Offer Shares”) at a cash consideration of RM2.05 per Offer Share. Notice of Take-Over Offer.pdf

LOL!

Err... to be taken private at rm 2.05 per share.

OSK ass-u-med and said out boldly that a potential M&A could make Southern Steel worth rm 3.04!!!

How now?

Back in January, Hume Industries was taken private. Yeah, I was appalled and totally disgusted at the privatisation offer. It was an insane price. Way too cheap!

• 20 Jan 2010: Comments On Hume Industries Privatisation
• 22 Jan 2010: Taking Of Hume Industries 1,2,3!
• 27 Jan 2010: Offer For Hume Industrious Is Way Too Low
• 17 March 2010: Who Is Public Investment Bank Trying To Kid By Saying Offer For Hume Industries Is Fair?

And sadly, I did not see MSWG mention anything on this privatisation offer. Hope I did not miss those comments, if any.

Any lessons from all these?

Is there any advantages of being a long term shareholder when the majority shareholder can delist the company any how and at any price? (ps. if one had followed OSK comments and bought SSteel based on the M&A thingee... how now?) Seriously hor, 'suka suka' list, 'suka suka' delist. I mean, as a minority shareholder, isn't there a feeling that one is a shareholder is simply there waiting to be screwed by the major shareholder?

And what about other Hong Leong companies? Would you dare to be a long term shareholder? What if a privatisation offer happens when the share is in the doldrums? What if the privatisation offer is way below your cost of investment?

How?

Southern Steel Swings Back To Profit

Just a very short posting.

Southern Steel announced its earnings tonight and just for the record, it has swung back to profits.

Past postings on Southern Steel can be found here

Featured Report: OSK On Southern Steel

As most are aware, Southern Steel announced its earnings last night. (ps: I did blogged on Southern Steel before. See A Very Brief Look At A Leading Steel Stock: Southern Steel and A Quick Look At Southern Steel And The Steel Sector )

This morning, I glanced at the stock price. It's opening trade was 1.82.

I chuckled.

I do have a reason.

Back in 2007, I remember Southern Steel and a report from HwangDBS.

Southern Steel was also trading around 1.82.

Note the header 'Sterling 1Q2007'.

This would be link to that earnings note: Quarterly rpt on consolidated results for the financial period ended 31/3/2007

Now as you would know Southern Steel reported its earnings last night. It lost some 12.6 million.

And as most are aware OSK was very bullish on steel since March. lol.. you know it when the report is filled with colour pictures.

Ah... 2 years ago, SSteel was 1.82, making money. Now it is also 1.82 but losing less money. I wondered what OSK would say.

Oh... as expected. Buy maintained. Target 2.12. Yeah, Southern Steel lost less money. lol.

(ps: they had a Sell Into Strength market strategy highlighted on the Edge Financial Daily recently. )

And I like what they wrote. lol

• The rich market liquidity is also prompting investors to switch their attention to high beta steel stocks, which justifies our BUY recommendation. We value the company based on 6x FY10 EPS and 0.91x FY10 NTA/share, and derive a 12-month target price of RM2.12.

Rich market liquidity? lol

Err.. how come volume nowadays pale in comparison to what we saw back in March-June 2009?

And they are basing their TP on FY10EPS.

The above screen shot showed what SSteel did so far.

In for first half 2009, SSteel lost some 78.15 million.

And guess what's OSK estimate earnings for SSteel in fy 2009?

Would you believe 47.5 million???

lol.

Now why is that figure incredible? For SSteel to have reach anywhere close to 47.5 million for fy2009 earnings, SSteel has to make 47.5 + 78.15 or 125.6 million for its remaining 2 quarters for fy2009. lol. Setting an extremely high expectations, eh?

And guess what's OSK expectations for SSteel in fy 2010?

Just a mere 158 million!!!

Well, if that's possible, for sure SSteel is selling at an extremely cheap valuation based on these incredibly high earnings forecasts!

How babe?

Wanna buy SSteel?

---------------
lol... I decided to search for OSK previous write-up on SSteel and I found that they wrote on SSteel back in May 2009.



Incredible. Back then SSteel was at 1.63 and OSK gave it a buy rating with a TP of 1.93.

So SSteel lost less money and the stock is at 1.82.

Surely a TP of 1.93 would not be seductive for SSteel given the 'rich market liquidity'. No wonder the TP adjusted higher to 2.12.

lol.. lose less money means a higher TP.

Good reasoning eh?

A Quick Look At Southern Steel And The Steel Sector

April 2nd. On the Financial Edge.

• OSK says worst is over for steel mills
  Written by Financial Daily
  Thursday, 02 April 2009 11:13
  
  OSK Research strongly believes that the worst is over for steel mills despite the gloomy outlook for the sector and poor earnings visibility of steel mills.
  
  “Reiterate overweight considering the strong asset backing of the local steel mills that are trading in the range of 0.15 times to 0.7 times price over net tangible asset, which are mostly below their historical trough level at -1 standard deviation. We think that the long steel companies under our universe at least justify a neutral or buy recommendation,” it added.
  
  However, the research house reckoned that steel mills might be at risk of running into another loss-making quarter or two before returning to the black.
  
  “We think the potential cumulative losses are limited given the small downside on steel prices from current levels. We are keeping our buy recommendations on Lion Industries (TP: RM1.60), Southern Steel (TP: RM1.82), Masteel (TP: RM1.03) and Kinsteel (TP: RM0.55) but rate Ann Joo (TP: RM1.12), and Perwaja (TP: RM0.70) as neutral,” OSK added.
  
  Bloomberg recently reported that Chinese steelmakers have asked iron ore suppliers to temporarily cut prices by 40% until an annual contract price agreement is reached.
  
  OSK said based on the old annual contract price for iron ore and coking coal that was supposed to end Tuesday, the blast furnace (BF) cost structure has become much more expensive compared with electric arch furnaces (EAF), which enjoy cheap input from a sharp plunge in scrap metal prices.
  
  “Assuming the news is correct, the new raw material price will bring BF production cost only slightly higher than the 2007 level, thus improving the competitiveness of iron ore-based producers. The new price mechanism is also timely Ann Joo’s mini-BF project, as the new costing would render its investment in hot metal processes economically viable upon commissioning in 1QFY10,” the research house said.

April 17th. On the Star Business. Steel sector shows early signs of recovery, prices improve

• PETALING JAYA: Long product steel millers will soon get back on the road towards profitability as demand and prices have rebounded from their lows of recent months.
  
  Malaysia Steel Works (KL) Bhd (Masteel) managing director Datuk Seri Tai Hean Leng said prices of long steel products had bottomed out from their lows in December and January after rebounding 10% to 15%.
  
  “While prices are expected to remain range-bound until the fourth quarter, demand has improved by 15% in the past month,” he told StarBiz in an email reply.
  
  Inventory levels in the steel mills will continue to fall from all-time highs in November and December last year.
  
  One of the factors in this recovery is the significant withdrawal by China, a major player, from the regional export markets.
  
  China’s export volume for steel products had been reduced to about 5% of the country’s gross output as its domestic demand surged upon implementation of its US$586bil stimulus package, he said.
  
  According to a Bloomberg report, China’s steel exports fell almost 55% in the first quarter to 5.14 million tonnes from the corresponding period last year.
  
  Tai said countries like Turkey and Taiwan, as well as Malaysia would be able to fill the supply gap left by China as these countries enjoyed advantages in pricing and freight costs in their respective regions.
  
  Exports of steel from Malaysia are thus expected to resume and gradually increase.
  
  Masteel expects some price volatility in the second and third quarters, as higher steel prices would face resistance, and prices would fall again as additional supply rushes in to meet demand.
  
  Nonetheless, the worst was over for steel mills, Tai said, adding that demand would pick up substantially in 2010. “We do not expect any write-downs from the second quarter onwards.”
  
  An officer from a big steel mill, who declined to be named, said signs of recovery were visible although the market was still relatively soft.
  
  “Prices have stabilised somewhat, and inventory levels are also being steadily reduced as a result of the de-stocking exercise carried out over the pass few months,” he added.
  
  AmResearch said in a report that steel prices were lifted by huge reduction in global steel production, tighter scrap supplies and further consolidation in the Chinese steel sector.
  
  It cited US steel consultancy Global Steel Dynamics’ expectation that global steel production could drop 14% this year from last year’s levels. In the first two months, global steel production had fallen by 22% to 24%.
  
  The research house also noted that global prices of billets had risen by US$40 per tonne in the last two weeks, suggesting that recovery was gaining momentum as various countries’ stimulus packages, particularly from China, had started to take effect.
  
  OSK Investment Bank analyst Ng Sem Guan said demand and prices of long products had improved on rising construction and property activities.
  
  “China has removed VAT (value-added tax) for flat steel but maintained the 15% to 25% export tax on long products, which is an indication that they are in demand for domestic consumption,” he said.
  
  Nevertheless, steel companies are expected to post one to two more months of losses before showing gradual earnings recovery in the second half. “We expect full recovery to happen in 2010,” Ng said.

27th April, on the Financial Edge.

• Stimulus packages boosting steel demand
  Written by Tony C H Goh
  Monday, 27 April 2009 00:21
  
  KUALA LUMPUR: “Green shoots” appear to have taken a foothold in the global steel industry as demand rises amid the various economic stimulus packages worldwide, but volatility could last until the end of the year, according to analysts and industry players.
  
  “We saw a very drastic drop in demand in the fourth quarter of last year. In December, for example, demand by the market in general dropped by more than 90%,” said local steel maker Malaysia Steel Works (KL) Bhd’s (Masteel) managing director Datuk Seri Tai Hean Leng.
  
  He said the over-correction had led to a sharp decline in stockholdings and prices as production slowed.
  
  “While we have also experienced an increase in demand of around 10% to 15% (since the beginning of the year), the price of steel is still not attractive enough,” Tai told The Edge Financial Daily.
  
  He said although steel billet prices had appreciated as much as 15% in the international market in recent months in tandem with the rise in demand, there was still no clear sign of any significant change in demand locally.
  
  Local steel bars are now priced at around RM1,800 per tonne versus its peak of almost RM3,000 last year, while steel billet is trading at around US$375 to US$385 (RM1,339 to RM1,374) in the international market compared to nearly US$1,000 per tonne in July 2008.
  
  Meanwhile, in a reply to The Edge Financial Daily, Lion Industries Corporation Bhd’s spokesperson said there was some slight improvement in domestic demand, while “there is also demand for export but international prices are still depressed”.
  
  The spokesperson said “inventories have been reduced to match the sales and production level” and it planned “to maintain low inventories”. He added that any improvement would depend on demand and price.
  
  According to a recent report by AmResearch, Ann Joo Resources Bhd, the country’s largest steelmaker by market capitalisation, had received 40,000 to 50,000 tonnes of new orders from the overseas market in the past two weeks.
  
  It was believed to be the company’s biggest order in six months, and Ann Joo had also resumed full production at its plant this month after a two-month shutdown. Exports were expected to reach 50% of its sales this year, up from about 30% in 2008 as Malaysia’s economy slowed, according to AmResearch.
  
  Goldman Sachs Group Inc had recently raised its gross domestic product growth forecast for China to 8.3% this year from 6% previously, attributing the upgrade to the nation’s four trillion-yuan (RM2 trillion) stimulus package.
  
  “Overseas demand at least has shown sign of recovery and the China factor is one of the reasons for the apparent rebound in external demand. The country became a net importer of steel since March,” said an industry analyst from TA Securities.
  
  “While that is a sign that demand is gradually normalising, the volatility is expected to remain until the fourth quarter of this year. But next year could be a good year for steel players if the stimulus packages announced globally are effective,” said Tai.
  
  Last Friday, among the steelma-kers, Ann Joo dropped two sen to close at RM1.65, Masteel rose one sen to 87 sen, Southern Steel Bhd, Malaysia’s second-biggest steel maker, lost two sen to RM1.67. Lion Industries was up 5.5 sen to RM1.05, while Kinsteel Bhd gained 0.5 sen to end at 62 sen.

On Tuesday, 5th May 2009 Southern Steel sees light at the end of the tunnel

• The company hopes to see a modest recovery in the demand for steel products in the second half of this year with the kicking in of stimulus packages both locally and abroad
  
  SOUTHERN Steel Bhd (5665) expects demand for its products to recover in the second half of this year, driven by government measures locally and abroad.
  
  Countries around the world are trying to spend their way out of a recession. Malaysia for instance, is spending money on infrastructure like roads, to revive economic activity.
  
  This is likely to spur demand for steel products like steel bars and wire rods, products made by Southern Steel.
  
  The company's general manager and chief financial officer Koay Chong Beng said the steel industry is due to see some light at the end of the tunnel soon.
  "We hope to start seeing a modest recovery in the second half of this year with the kicking in of stimulus packages both locally and abroad," he told reporters after the company's annual shareholders' meeting in Seberang Prai, Penang.
  
  Steel was one of the commodities hardest hit by the financial crisis.
  
  "Prices and sales volume dropped more than 50 per cent within three months from September to November last year and the crisis badly affected the performance of all the companies within our group in the last quarter of the year," he added.
  
  The plunge in demand meant that its normal stock levels doubled to more than six months. It also bought the stocks when steel prices were high.
  
  As prices fell, Southern Steel had to write down the value of its inventory and it took a RM359 million hit.
  
  The company's chief operating officer Chow Chong Long said Southern Steel is committed to spend RM50 million this year to upgrade its Penang facility.
  
  "Our inventory levels are currently the lowest among the country's five integrated steelmillers.
  
  "Our term loans which total US$25 million (RM88 million) will be fully paid off by August," said Chow.

Last night Southern Steel announced its earnings.

Revenue plunged and losses were huge.

Of course, some would argue that the market is already discounting this 'bad; news and would say that the losses were already as expected. :p2

Of course, some would also say that the way the market is discounting the bad news is rather excessive and that the massive run in some steel stocks simply isn't justifiable. :p2

The following chart shows the massive price movement in Southern Steel recently.



How now brown cow?

A Very Brief Look At A Leading Steel Stock: Southern Steel

Southern Steel announced its quarterly earnings. Quarterly rpt on consolidated results for the financial period ended 30/9/2008

I thought it was extremely interesting to see how it perform since I do regard Southern Steel as one of the leaders in the steel sector.

Here's the briefest of brief look at how it performed.



Looks really superb if one compares what it earned for the same period last year!

However, as we all knows, looks can be so deceiving at time!

3 months earlier, in August 2008, Southern Steel announced the following set of numbers.


3 months ago, Southern Steel reported net earnings of 202.466 million. It was a bumper time!

In today's earnings, Southern Steel net earnings only totals 65.697 million!

Not looking good at all considering that steel prices and demand has dropped!