Sahaviriya Steel Industries

Sahaviriya Steel Industries Plc (SSI)

Net loss: In its worst results since 4Q08, SSI reported another huge net loss of Bt5bn for 2Q12 following a net loss of Bt2.8bn for 1Q12. The red ink is deeper than anyone expected (we didn’t preview 2Q12; the consensus estimate was a net loss of Bt1.6bn).
Results highlights: The unfavorable bottom-line was caused by a Bt4.4bn net loss at TCP, UK (production re-started in April 2012; 335K tonnes of slab to SSI Thailand; a very thin metal spread)—much deeper than the Bt2.8bn loss in 1Q12. In Thailand, the HRC (rolling business) operation chalked up a net loss of Bt733m (versus a Bt7m profit in 1Q12), due to lower sales volume as a result of competition from imported HRC. HRC sales volume fell 15% QoQ to 423K tonnes, but the metal spread improved 27% QoQ to $115/tonne in 2Q12, due to a 6% lower slab cost (the mean sales price dipped 3% QoQ). The net gearing ratio rose from 2.09x at end-March to 2.99x at end-June.
Outlook: SSI will post another core operational loss for 3Q12, given a loss at TCP (we expect a 78% run rate, far below the break-even point of 90%). In Thailand, the HRC business should improve QoQ on volume expansion (but spread will decline QoQ).
What’s changed? Our FY12 net loss forecast has deepened to Bt9bn (from Bt4.1bn) to factor in the huge 1H12 loss of Bt7.9bn. Our FY13 earnings projection falls to Bt51m from Bt243m. We haven’t yet factored the recapitalization plan into our model (approved by the board on Aug 14): 1) a US$100-170m PP to new partner, Vanomet Holdings AG (a European steel trader), 2) a $39m RO at a ratio of 10:1, 3) a $112m PP to other investors and 4) a CD buyback (mainly held by the Viriyaprapaikit family). SSI may gain $420m from the recap and its D/E ratio drop to 1.6x Vanoment will hold 23.8% of SSI; the Viriyaprapaikit family’s stake will fall to 33.6% from 35.7%. The offering price is Bt0.68. 
Recommendation: The new partner and recap plan will mitigate the default risk. If the cash call is successful, there will be a heavy dilution effect (the number of shares will more than double from 18,184m to 39,868m). Our SELL rating stands with a YE12 target price cut to Bt0.52 (down from Bt0.67) to reflect diminished expectations for profitability, pegged to an unchanged PBV of 0.6x (1SD below its FY06-11 mean).