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Kinsteel, Looking Good
Whats Driving The Profitability

If you were to check Kinsteel's share price and volume traded for the past couple of months, there is nothing to suggest anything "sinister" or devious was syndicate involvement. The share is pretty clean. The company reported a ridiculous RM422m net profit for the 9 month preiod. That's largely due to recognition of negative goodwill (don't ask... go take an accounting class). What is a more relevant figure is the net profit after minority interests which came in at RM49.6 million for the 9 months. That was still a huge jump of over 200% from the same period last year's net profit figure of RM16.4m. The cumulative EPS for the 9 month totals a staggering 42.5 sen (mother share rose to RM1.40 today from the previous day's close of RM1.18).

The overall improvement was due to the enlarged group which resulted in strong upstream activities, and overall improved demand from the region. ... That's basically bulls shit stuff. Kinsteel on its own is a decent company. In 2004 it made a pretax profit of RM26.2m from revenue of RM453m. In 2005, the pretax profit was RM20.5m from revenue of RM550m. However, cash flow was in the negative territory slightly, not a major concern but dissuades the company from expansion plans. In steps Maju Group, this is actually a very good backdoor listing for the revived Perwaja Steel.

The key was on 7 October 2005, the company entered into a conditional Strategic Alliance Agreement with Equal Concept ( Maju subsidiary) to acquire a 51% interest in Perwaja Steel. At the same time, Kinsteel will use a SPV named Perfect Channel, to acquire a 51% interest in Gurun Assets from various Maju subsidiaries (Maju Rebar Coatings, Maju Steel Centre, Perwaja Rolling Mill and PS Water). However, no liabilities will be assumed by Kinsteel.

Here lies another key: the purchase of Perwaja Steel is for RM197.6m, which will be satisfied via an issuance of 60m new Kinsteel shares at RM1.36 and a cash settlement of RM116m. The deal is a sweet deal for Kinsteel and also leveraged on Perwaja's strengths and masks its deficiencies.

Not many are aware but Perwaja is the biggest producer of hot briq iron and DRI at 1,200,000 MT. The nearest competitor is Amsteel at 750,000 MT. Perwaja also towers in Billet/Bloom at 1,300,000 MT production capacity equalling Southern Steel's capacity, while Amsteel has a 1,050,000 MT capacity there.

While I thought the deal was sweet for Kinsteel and Maju, the swiftness of results after consolidation took me by surprise. The big question for all is whether there is more upside... The key is in the issuance price to Maju, its at RM1.36. The stock basically was ignored for the past few months despite the proposed deal. Now that that is sealed and done, the company just went about reporting the actual financial figures and let the market do the rest. The stock jumped today from RM1.18 to RM1.40. The 9 month EPS figure is already at 42.5 sen. Even giving that a 4 times PER is already RM1.70. Again the issuance at RM1.36 to Maju is very critical as it already assumes a huge undervaluation in most cases of share issuance, thus more upside is very likely. In addition, there was no hanky panky in stock price and volume for past few months and that would also suggest that no one will be selling for a long time.

The warrants are even more attractive. Conversion price at RM1.00 and expiring in only 2011. Even at 61 sen, the premium is only 61+100 / 140 = 15% premium, and a healthy gearing at 2.3x. Assuming RM1.70 as a short term target and giving it a 10% premium, the warrant would then go to 86 sen minimum. Bodes well for all kind of players, just wished I had looked more closely at Kinsteel earlier, however, it looks like still not too late to venture in.


simon_alibaba said…
do you have any call on Ranhill Utilities or RUBHD?

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