Mill Con Steel

Mill Con Steel Plc (MILL)
Beat the consensus estimate: MILL reported a core profit of Bt133m for 1Q12, much better than the core loss of Bt53m it posted for 4Q11. The result was below our estimate (Bt177), as GM missed our assumption. 1Q12 profit beat the consensus expectation (of a loss).
Results highlights: On a QoQ basis, the bottom-line turnaround was due to record sales of Bt5.2bn (up 52%) and an SG&A expenses plunge (down 55% QoQ). The impressive sales were driven by volume—demand recovered swiftly after the 4Q11 flooding ended (and logistics problems eased). GM declined from 5.9% in 4Q11 to 5.3% in 1Q12, due to higher raw material costs. The SG&A/sales ratio dived to 1.4% from 4.6% the previous quarter. Net gearing inched up from 2.1x at YE11 to 2.2x end-March.
Outlook: We expect QoQ core profit growth in 2Q12, driven by the top-line and a fatter metal spread. The Green Mill billet-casting plant started up in mid March.
What’s changed? 1Q12 earnings represent 17% of our full-year projection, which we maintain 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 GM expansion with MILL’s backward integration into billet casting. Note that 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 is only player that looks set to deliver black ink for 1H12.  Our BUY rating stands with a YE12 target price of Bt3 pegged to a PBV of 1.5x (its FY08-11 average). The risk-reward tradeoff is attractive—MILL’s current PBV of 1.1x is 1SD below its mean, while its FY12 profit will surge, driven by GM expansion enabled by billet production.
If the firm were to purchase a wire rod plant in late FY12 (capacity of 500K tonnes/year) in addition to its current 505K tonnes/year of rebar capacity, we would expect: 1) YE13 BVS to increase to Bt2.69 from our current forecast of Bt2.38, due to Bt1.5bn in proceeds from a recapitalization (convertible debentures and warrants—all private placements), and 2) our FY14 EPS forecast to rise to Bt0.60 from Bt0.57.