Sahaviriya Steel Industries

Sahaviriya Steel Industries Plc (SSI)
Net loss: SSI reported another huge net loss of Bt2.8bn for 1Q12 following a net loss of Bt2.6bn in 4Q11. We weren’t surprised at the deep red ink (we didn’t preview the 1Q12 accounts). The loss was far deeper than the consensus estimate of a loss of Bt500m.
Results highlights: The poor bottom-line was caused by a Bt2.8bn net loss at TCP (the slab-casting plant in the UK; still yet to start-up in 1Q12)—deeper than the Bt2.0bn loss it posted for 4Q11. In Thailand, the HRC (rolling business) operation just broke even with a net profit of Bt7m for 1Q12, up from a Bt325m net loss in 4Q11 (when flooding in the central provinces inhibited sales and production). HRC sales volume bounced 64% QoQ to 497K tonnes, but the metal spread plunged 31% QoQ to $91/tonne in 1Q12, due to a 4% average price drop in the face of an increased slab cost. 
The balance sheet has weakened further—the net gearing ratio rose from 1.75x at YE11 to 2.09x at end-March (the D/E ratio jumped from 2.55x at YE11 to 2.86x at end-March).
Outlook: SSI will post a core operational loss for 2Q12 (the fifth straight quarter), as TCP will run heavy losses for several months (it cast its first slab on April 18, 2012). In Thailand, the HRC business should improve QoQ on a fatter rolling margin brought about by a lower slab cost. But that won’t be sufficient to fully offset the effect of a heavy loss at TCP.
3Q12 numbers will improve QoQ, but we are skeptical that SSI will announce a bottom-line in black ink. 
What’s changed? We have cut our FY12 core forecast from a profit of Bt441m to a Bt4.06bn loss. We now project an FY13 core profit of Bt243m, revised down from our previous expectation of Bt1.4bn.
Recommendation: Our SELL rating stands with a pared back YE12 target price of Bt0.67 (down from Bt0.70), pegged to an unchanged PBV of 0.6x (1SD below its FY06-11 mean). Liquidity risk is our biggest concern—SSI’s ability to service interest repayment obligations, given that it will post losses for at least the next two quarters.