Mill Con Steel Industries

GM expansion ahead BUY (maintained) Target Price: Bt2.70 Price (20/01/12): Bt2.44

Mill Con Steel Industries (MILL)

Investment thesis: We maintain our BUY rating on MILL with a YE12 target price of Bt2.70, derived from an FY12 PER of 7.5x and a PBV of 1.27x. There is scope for an FY12 profit surge, driven by GM expansion brought about by backward integration (billet production; full commercial run in 1Q12). MILL currently trades at a YE12 PBV of 1.1x, a deep discount to its 1.8x mean. The expected 1Q12 earnings turnaround should bring on a re-rating. MILL purchased a wire rod plant, so there is scope for upside to our profit model.

Shallower QoQ loss in 4Q11; earnings turnaround in 1Q12: We expect the firm to post red ink again in 4Q11, but shallower QoQ. Sales during the quarter were dampened by the flooding and there were additional expenses tied to test running the Green Mill billet plant. However, we anticipate a bottom-line turnaround in 1Q12, driven by a fatter GM brought about by production cost savings with the start-up of the Green Mill in Feb. We estimate that the cash cost of making steel bar from melted scrap billet is 20% lower than from rolling billet purchased from third parties.

Strong EBITDA guidance for FY12: MILL aims for 10% revenue growth this year, driven by volume (flat pricing). The EBITDA margin target is 10% (a new record), to be enabled by billet production and margin expansion brought about by manufacturing special grades of steel (a 10% contribution to FY12 sales versus almost nothing in FY11). The guidance implies Bt1.6bn in EBITDA this year, double YoY and more than sufficient to offset the effect of depreciation costs for the Green Mill (Bt122m per year).

Wire rod plant should boost earnings: MILL plans to buy a wire rod mill with a capacity of 500K tonnes/year from Thai Special Steel Plc (under debt restructuring). The total investment cost is Bt3.1bn (US$198/tonne), much cheaper than for a greenfield project (MILL guides for a replacement cost of at least $1000/tonne). The plant would boost the firm's rolling capacity to 1.05m tonnes/year, making it the second-biggest long steel maker in Thailand after TSTH. The deal is expected to be closed soon. Then it will take three months to resume production. Assuming a 50% utilization rate, wire rod revenue would be Bt6.9bn with a 9% EBITDA margin—scope for 40% upside to MILL's EBITDA/year.