PP 7767/09/2010(025354)

10 March 2010

Malaysia Corporate Highlights

RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

V is it Note
10 March 2010
MARKET DATELINE

Perwaja Holdings Share Price

Fair Value
:
:
RM1.45
RM1.79
Better Quarters Ahead Recom : Outperform
(Maintained)

Table 1 : Investment Statistics (PERWAJA; Code: 5146) Bloomberg: PERH MK

Net FD EPS Net
FYE Turnover Profit EPS EPS Growth PER# C.EPS* P/NTA Gearing ROE GDY
Dec (RMm) (RMm) (sen) (sen) (%) (x) (sen) (x) (x) (%) (%)
2009A 1,571.2 -115.5 -20.6 -13.0 n.m. n.m. - 0.9 0.9 -12.4 -
2010F 2,187.2 84.2 15.0 14.9 >100 9.7 - 0.8 0.8 8.3 -
2011F 2,284.9 127.9 22.8 21.0 40.9 6.9 - 0.7 0.6 11.1 -
2012F 2,298.1 135.5 24.2 22.1 5.1 6.6 - 0.6 0.4 10.6 -
Main Market Listing / Trustee Stock / Syariah-Approved Stock By The SC * Consensus Based On IBES Estimates

Issued Capital (m shares) 560.0

♦ Anticipates 2010 benchmark iron ore contract price to rise 20-40%. Market Cap(RMm) 812.0
Daily Trading Vol (m shs) 1.2
Perwaja anticipates iron ore benchmark prices in 2010 (Apr 2010 – Mar
52wk Price Range (RM) 0.59 – 1.78
2011) to rise by 20-40%, given the global iron ore miners’ improved
Major Shareholders: (%)
bargaining power amidst sustained steel consumption in China. Given its
Kinsteel 37.3
relatively flat production cost curve in 1HFY12/10 (as Perwaja has already Equal Concept 31.4
locked in iron ore pellets at low prices in anticipation of higher iron ore prices
going forward), Perwaja anticipates a steep margin expansion in 1HFY12/10
from the rising global steel price trend. FYE Dec FY10 FY11 FY12
EPS chg (%) - - -
♦ Competitiveness of DRI plant remains despite having anticipated Var to C.EPS (%) - - -
higher production costs. While higher iron ore pellet price will increase
Perwaja’s billets production cost, Perwaja feels that it will still have an edge Share Price Chart
over the other upstream steel producers (which use alternative feedstock
such as scraps and pig iron in their steelmaking process), as prices of
alternative feedstock have increased even more substantially.
♦ Capacity expansion on track, but blast furnace project remains
unfeasible. Perwaja is on track to expand the capacity at both its DRI and
steelmaking plants by 20% and 55% to 1.8m tonnes/annum and 2.1m
tonnes/annum by mid-2010. However, Perwaja hinted that its blast furnace
investment project will remain shelved.
♦ Perwaja’s view on Vale’s pelletising plant project in Perak. Perwaja Relative Performance To FBM KLCI
feels that Vale’s plan to set up a regional iron ore hub in Manjung, Perak is
unlikely to result in lower iron ore price for Perwaja, given Vale’s significantly
stronger bargaining power relative to Perwaja. Nevertheless, Perwaja
believes the presence of iron ore distribution hub will help reducing its Perwaja Holdings

working capital requirement (and hence reducing finance cost) as it can then
stock up less iron ore pellets.
FBM KLCI
♦ Risks. Risks for the steel sector include: (1) Oversupply in China that results
in dumping activities by Chinese steel producers in the international market;
(2) Steep contraction in global steel consumption that will weigh down on
international steel prices; and (3) Higher-than-expected energy costs, in
particular, natural gas and electricity.
♦ Earnings forecasts. Maintained.
♦ Investment case. Indicative fair value is RM1.79 based on 12x FY12/10 EPS
Chye Wen Fei
of 14.9 sen, in line with our 1-year forward target PER of 12x for the long (603) 92802172
steel product sector. Maintain Outperform. chye.wen.fei@rhb.com.my
Please read important disclosures at the end of this report.

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 10 March 2010

Visit Note

♦ Anticipates 2010 benchmark iron ore contract price to rise 20-40%. Perwaja anticipates iron ore
benchmark prices in 2010 (Apr 2010 – Mar 2011) to rise by 20-40%, given the global iron ore miners’ improved
bargaining power amidst sustained steel consumption in China (the world’s largest steel consumer and producer).
This is evidenced in iron ore spot prices, which have risen by 33.3% since Dec 09 (see Chart 1). In anticipation of
a steep rise in iron ore prices in 2010, Perwaja has recently concluded two cargoes of iron ore pellets (equivalent
to approximately 260,000 tonnes) at US$140/tonne (that is roughly 25% higher than its 2009 contract iron ore
pellet price of US$110/tonne). With the additional two cargoes of iron ore pellets, Perwaja will have sufficient iron
ore pellets for its direct reduction iron (DRI) plant until Jun 10. Given its relatively flat production cost curve in
1HFY12/10, Perwaja anticipates a steep margin expansion in 1HFY12/10 from the rising global steel price trend,
underpinned by the anticipated sharp rise in 2010 iron ore benchmark prices.

Chart 1: Iron Ore Fines Spot Price Movement in China

US $ / t o nne

145

140

135

130

125

120

115

110

105

100

Source: Bloomberg

♦ Competitiveness of DRI plant remains despite higher production costs. While the higher iron ore pellet
price will increase Perwaja’s billet production cost, Perwaja feels that it will still have an edge over the other
upstream steel producers (which use alternative feedstock such as scraps and pig iron in their steelmaking
process), as prices of alternative feedstock have increased even more substantially (see Charts 2-4). Perwaja
believes that prices of pig iron and scraps are likely to rise further in the near term, as:

1. The availability of scraps will remain scarce in the international market on the back of the still weak scrap
collection activities in advanced economies; and

2. Prices of both iron ore fines and metallurgical coke (which are the key inputs in producing pig iron) are likely
to sustain (if not increasing further) on the back of a strong utilisation rate in the Chinese steel sector (the
world’s largest steel producer).
Chart 2: Iron Ore Pellet Spot Price Movement Chart 3: Iron Ore Fines Spot Price Movement

US $ / t o nne US $ / t o nne

150 145

145 140

135
140
130
135
125
130
120
125 +26.7% +32.9%
115
120
110
115 105

110 100

Source: Bloomberg Source: Bloomberg

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 10 March 2010

Chart 4: Ferrous Scrap Price Movement

US $ / t o nne

340

330

320

310

300

290 +30.1%
280

270

260

250

Source: Bloomberg

♦ Capacity expansion on track, but blast furnace project remains unfeasible. Perwaja is on track to expand
the capacity at both its DRI and steelmaking plants by 20% and 55% to 1.8m tonnes/annum and 2.1m
tonnes/annum by mid-2010. However, Perwaja hinted that its blast furnace investment project will remain
shelved, given:

1. The high prices of metallurgical coke (which is the key energy source in operating a blast furnace); and

2. Overcapacity in the flat steel product sector (in particular steel plates) remains admidst slow demand
recovery and rising capacity (in particular, China).

♦ Perwaja’s view on Vale’s pelletising plant project in Perak. Perwaja feels that Vale’s plan to set up a
regional iron ore hub in Manjung, Perak (targeted to commence by 2012) is unlikely to result in lower iron ore
price for Perwaja, given Vale’s significantly stronger bargaining power (which controls more than 15% of the iron
ore in the world) relative to Perwaja. Nevertheless, Perwaja believes the presence of an iron ore distribution hub
in Malaysia will help reducing its working capital requirement (and hence reducing finance cost) as it can then
stock up less iron ore pellets.

Earnings forecasts

♦ Earnings forecasts. Maintained. In our FY12/10-12 forecasts, we have yet to incorporate the additional capacity
of 1.3m tonnes of billets p.a. arising from the restoration of legacy steelmaking plants that will come on stream
by mid-2010.

Risks

♦ Risks to our view. The risks include: (1) Oversupply in China that results in dumping activities by Chinese steel
producers in the international market; (2) Steep contraction in global steel consumption that will weigh down on
international steel prices; and (3) Higher-than-expected energy costs, in particular, natural gas and electricity.

Valuations And Recommendation

♦ Investment case. We continue to like Perwaja for:

1. The improving steel sub-sector outlook, underpinned by the implementation of stimulus packages by various
economies and reduced concerns on dumping activities by major steel producing nations;

2. Perwaja’s structural advantages over its competitors; and

3. Perwaja’s strong earnings growth from FY12/10, underpinned by: (1) Higher average selling prices; (2)
Higher sales volumes; and (3) Lower production costs.

♦ Indicative fair value is RM1.79 based on 12x FY12/10 EPS of 14.9 sen, in line with our 1-year forward target PER
of 12x for the long steel product sector. Maintain Outperform.

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 10 March 2010

Table 2: Earnings Forecasts Table 3: Forecast Assumptions

FYE Dec (RMm) 2009A 2010F 2011F 2012F FYE Dec 2010F 2011F 2012F

Revenue 1,571.2 2,187.2 2,284.9 2,298.1 Annual Capacity ('000 tonnes)

Growth (%) -32.3 39.2 4.5 0.6 DRI 1,650 1,800 1,800
Billet 1,950 2,600 2,600
EBITDA -129.2 249.5 263.5 257.4
EBITDA margin -8.2 11.4 11.5 11.2 Production Volume ('000 tonnes)
DRI 1,450 1,500 1,500
Depreciation & amortisation 73.9 -70.4 -68.4 -66.5 Billet 1,200 1,300 1,300
Net interest expense -87.3 -94.9 -67.2 -55.4
Average Selling Price (US$/tonne)
Pretax profit -142.5 84.2 127.9 135.5 DRI 400 420 410
Tax expense 27.0 0.0 0.0 0.0 Billet 525 535 530
Net Profit -115.5 84.2 127.9 135.5
RM:US$ 3.25 3.30 3.25

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Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
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Industry/Sector Ratings

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