Mill Con Steel

Mill Con Steel Plc (MILL)

Loss, as expected: MILL reported a net loss of Bt56m for 4Q11, shallower than the Bt93m loss it posted for 3Q11. The result was in line with our estimate.
Results highlights: The unfavorable 4Q11 number was mainly due to an 11% drop in revenue (sales volume declined because of a demand slump and logistics problems during the flooding). GM rebounded from 2.8% in 3Q11 to 5.9% (back to its normal level). The SG&A/sales ratio rose to 4.6% in 4Q11 from 1.3% the previous quarter, as there were significant pre-operating expenses for the Green Mill (a billet plant). EBIT expanded from only Bt10m in 3Q11 to Bt57m in 4Q11, but was insufficient to cover interest expenses. EBITDA was Bt86m in 4Q11, up from Bt23m in 3Q11. Net gearing declined slightly from 2.3x at end-Sept 2011 to 2.1x at YE11.
Outlook: We anticipate a bottom-line turnaround in 1Q12, driven by a fatter GM brought about by production cost savings with the commercial start-up of the Green Mill billet plant in Feb. The substantive difference between our 1Q12 forecasts for TSTH (red ink) and MILL (black ink) is depreciation expenses of about Bt60m/quarter for TSTH’s mini blast furnace, (which isn’t currently operating because of the high prevailing price of iron ore compared with scrap). 
What’s changed? We maintain our projections unchanged—a strong core profit jump from Bt112m in FY11 to Bt784m in FY12, driven by 10% revenue growth (a post-flooding demand recovery) and fatter GM. Our top-line forecast is at the lower bound of management guidance of 10-15% for this year.
Recommendation: Among the steel stocks under our coverage, MILL should outperform on the swiftest earnings recovery in the sector—a turnaround to profitability in 1Q12. Our BUY rating stands with a YE12 target price of Bt2.70 pegged to an FY12 PER of 7.5x and a PBV of 1.2x. MILL currently trades at a YE12 PBV of 1.2x, far below to its 1.6x mean since debuting on the SET. If the firm were to purchase a wire rod plant (capacity of 500K tonnes/year) in addition to its current 505K tonnes/year of rebar capacity, there could be scope for upside to our earnings model.