Price Target: RM1.51
Share Price: RM1.87
Baosteel In Talks to Buy Amsteel Mills?
News:
According to Bloomberg, Baosteel Group Corp (the second largest steel player in China) is in talks to buy a stake in Amsteel Mills (a 99.9%-owned subsidiary of LICB, which produces long steel products) for about US$1bn. However, the size of the stake in Amsteel Mills, which Baosteel is rumoured to acquire, is unknown.
Financial impact:
No immediate financial impact.
Pros / Cons:
There are still many uncertainties with regards to the latest news (even if the news turns out to be true). The uncertainties include: (1) The pricing; (2) The size of the stake; and (3) Whether the US$1bn acquisition price includes other steel assets within Lion Group of companies, as LICB’s net assets (including Antara Steel Mills) stood at only ~RM1.5bn as at 30 Jun 2010.
Nevertheless, we are positive on the latest news (if it realizes), as the emergence of Baosteel into LICB would: (1) Enhance LICB’s steel operation’s production and cost efficiencies; (2) Improve LICB’s balance sheet and cash flow position (given Baosteel’s strong financial standing); and (3) Result in an immediate re-rating catalyst to LICB’s share price if Baosteel is acquiring Amsteel Mills at high valuations.
Risks Downside risks:
(1) Overcapacity in China remains over the longer term; (2) Volatile input prices; and (3) Influx of steel products at cheap prices.
Forecasts:
Maintained.
Rating SELL
Negatives – (1) Inability to pass on higher cost of raw materials and energy to end-users; (2) Complicated corporate structure; and (3) Corporate governance issue could surface from the venture into blast furnace project.
Positives – (1) Biggest winner from the anticipated pickup in construction activities from 2011; and (2) Low P/NTA.
Valuation:
Rating unchanged pending outcome of this latest development.
SOP-based TP maintained at RM1.51
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