Mill Con Steel

Mill Con Steel Plc (MILL)

Investment thesis: MILL is the only profitable steel firm that we cover and looks set to remain so for the medium-term (red ink for big players, SSI and TSTH). We have rolled over our investment horizon to YE13 and arrived at a new target price of Bt2.70 (down from Bt3 for YE12, which reflects our earnings forecast downgrade), pegged to PBV of 1.4x (10% below its FY08-11 average; the prospects for the steel industry are modest). We expect ROE to jump from 3% in FY11 to 11.5% in FY12. MILL currently trades at a YE12 PBV of 1.2x, 1SD below its long-term mean of 1.5x.
Expect bottom-line to triple in FY12: We have slashed our net profit forecasts by 48% for FY12 and by 45% for FY13 to factor in disappointing 2Q12 results (a lower-than-expected of steel sales price and higher-than-assumed interest expenses). Despite our cuts, MILL should still deliver strong core profit growth of 267% to Bt410m for this year, driven by 14% top-line expansion (sales volume growth of 20% to 800K tonnes) and a fatter GM (up from 4.8% in FY11 to 7.8% in FY12m, boosted by production from its billet plant).
Profit will continue in 3Q12: MILL’s run rates will be high—73% for rolling (rebar) and 80% for melting (billet). Thanks to back-to-back orders exceeding 100K tonnes, it will post a net profit for 3Q12 (probably flat QoQ), a turnaround from a loss of Bt93m in 3Q11. We anticipate that big steel makers, SSI and TSTH, will post further red ink for July-Sept operations.
Upside from special grades: The firm will start making special grade billet in 4Q12. MILL intends to use it internally for special grade products—commercial grades yield substantially fatter spreads. Management plans to increase the revenue contribution of special grades from negligible in FY12 to 10% in FY13 and guides that value-added products will boost the bottom-line by about Bt100m. That would constitute upside to our current model.
Wire rod plant acquisition still under negotiation: MILL is in the process of buying Thai Special Steel Plc (500K tonnes of wire rod capacity). The total investment cost is Bt3bn—half of which will be funded by equity, half by debt. The firm will launch a private placement to help pay for the deal, which isn’t in our current model.