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Mill Con Steel

Best play in the sector BUY (maintained) Target Price: Bt3.00 Price (11/04/2012): Bt2.44

Mill Con Steel Plc (MILL)



Investment thesis: MILL is our preferred steel stock—in an underperforming sector, it is the only steel firm under our coverage likely to be profitable in 1H12 (red ink for big players—SSI and TSTH). We have upgraded our YE12 target price to Bt3 from Bt2.70, pegged to a re-rated target PBV of 1.5x (its FY08-11 average), up from 1.27x, as we expect ROE to jump from 3% in FY11 to 20% in FY12. The risk-reward tradeoff is attractive—MILL's PBV is 1SD below its mean, while its FY12 profit will surge, driven by GM expansion facilitated by backward integration into billet production.

1Q12 bottom-line turnaround: 1Q12 sales shot up nearly 20% YoY, better-than earlier MILL guidance of 15%. Organic GM for the quarter (excluding the Green Mill, which started operating in mid March) fattened YoY. We estimate a 1Q12 core profit of Bt177m (its best num ber since 2Q08) versus a 4Q11 loss of Bt53m.

Upside from upstream production in 2Q12 onward: The Green Mill billet plant is now running productively. Management anticipates an 80% utilization rate for FY12 (300K tonnes of billet for internal use and 100K tonnes of billet sales to third parties). In addition to production cost savings, billet sales of 100K tonnes (about Bt2bn at the prevailing market price), would mean upside to our revenue forecast (we currently project FY12 revenue growth of only 10%; management guides for 15%).

Another acquisition: MILL is in the process of buying Thai Special Steel Plc (TSSI), a steel rod maker. We expect the deal to be sealed in 4Q12. MILL stands to benefit from the following: 1) a cheaper investment cost than for a greenfield project (US$102/tonne against least $1,000/tonne for a new plant), 2) TSS would make MILL the second-largest long steel maker in Thailand after TSTH, 3) scope for Bt5.2bn in wire rod sales (30% upside to our FY13 revenue forecast), 4) our FY14 EPS forecast would rise to Bt0.60 from Bt0.57.

Furthermore, MILL's YE13 BV would rise to Bt2.69 from our current assumption of Bt2.38, due to Bt1.5bn in proceeds from the conversion of debentures and exercising of warrants. The warrants and convertible debentures were allocated by private placement in order to help finance the takeover of TSSI.


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