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from the wordfile attached to the quarterly earnings.
The Group has started the production of the new 4 feet cold rolling mill after the successful commissioning stage at end of March. We will focus on the production of high drawing quality CRC and thin gauge CRC to position us as a leading producer of high quality cold rolled coil. With the increased production capacity and favorable market condition, the Group is well prepared to capture the business opportunity of coming quarters.
Err.. yes.. it does not really help yes? But that's the best i have...
Ahh... found a copy of write-up dated... way back 2005. [Updated on 25/02/2005 13:56:00]
Principal activities:Manufacture CRC, GI and PPGI coils. Major shareholder/s:China Steel Asia Pacific Holdings Pte Ltd, China Development Industrial Bank Inc.
Floated on the Main Board of Bursa Malaysia, Ornasteel Holdings (Ornasteel) is currently the largest producer of cold rolled steel coils (CRC), hot-dip galvanised (GI) and pre-painted galvanised (PPGI) steel coils in the country. Started in the early 90s as an exporter of steel pipes and CRC, Ornasteel was subsequently acquired by China Steel Corporation (CSC) of Taiwan in Dec 2000. Under the new management, Ornasteel discontinued its loss-making pipe division to focus on its core business of rolling CRC and downstream products such as GI and PPGI in its plant in Ayer Keroh, Melaka.
At present, its subsidiary, Ornasteel Enterprise Corporation (M) S/B (OEC), has the capacity to roll 444,000 tonnes (MT) of CRC a year, amounting to two-thirds of current local production. CRC are basically derivative products of hot-rolled steel coils (HRC) that have undergone a cold-reduction process. By passing through reversing mills under extreme tension and pressure, hot-rolled steel sheets can be reduced by between 50% and 90% of their original thickness. The highly strained steel sheets are then annealed at temperatures above 650% Celsius to restore their ductility and subsequently skin passed to impart the desired service roughness. Operating 2 reversing mills (3-feet and 4-feet widths), OEC rolls CRC to various grades (full hardness, commercial and drawing), thickness and service roughness for use in the manufacturing of pipes and tubes, steel drums, steel furniture, electrical and home appliances and automotive parts.
Like its competitor, who supplies a significant portion of production to its pipe-making sister company, OEC channels a third of its rolled CRC (full hardness steel) to Group Steel Corporation (M) S/B (GSC) as feedstock for the latter’s metallic coating division. With arguably the largest coating operations locally, GSC has the capability to produce up to 240,000 MT of GI and 120,000 MT of PPGI coils annually. GI are steel sheets that are coated (via the hot-dip process) with a layer of metallic zinc, which acts as a barrier and ‘sacrificial’ agent for the corrosion-prone steel.
About 40% of the finished product from its continuous galvanising line will be further coated with layers of coloured organic paint, comprising a mixture of polyesters, epoxies, vinyls, plastisols, acrylics and flurocarbons to produce the group’s third major product line – PPGI coils. Marketed under various sub-brands, such as ‘PE-exterior’ (standard polyester), ‘PVDF’ (polyvinyldene fluoride), ‘Hiflex’, ‘Antistat’, ‘Ever Fresh’ and ‘Ever Cool’, the PPGI coils are much sought after domestically and internationally by the roofing and cladding industry.
The majority of GCS’s products are structural grades used primarily to fabricate door and window frames, steel decks, trunks, trusses and roofing and cladding sheets. The higher grades (commercial and drawing) of GI and PPGI cater to the production of air-conditioner ducts, ceiling tees, home appliance casings and satellite panels.
Being part of the enlarged CSC Group, Ornasteel has a distinct advantage in sourcing its primary raw material – HRC – especially the thinner, high-grade interstitial atom free steel used for rolling CRC used in the automotive industry. Nonetheless, having only obtained partial import duty exemptions, Ornasteel has to source 40% of its HRC needs from Megasteel S/B, the country’s sole producer and ironically, its future competitor in the re-rolling segment. The other major raw materials such as metallic zinc, organic paints and chemicals are predominantly imported from Canada, Australia, Europe, Singapore, Korea and Japan.
While exports formed the majority of the group’ sales during the early years (see figure 1), these have dwindled to 1% in recent times, especially after the Ministry of International Trade and Industry waived its export requirements in 2001 as a stop-gap measure to relieve local shortage. Nevertheless, exports of metallic and colour coated sheets are still at relatively high levels, with almost half of current production consumed by China (22% of exports), Vietnam, Canada, Thailand and Australia.
Segment-wise, sales of CRC account for 48% of group revenue, with GI and PPGI contributing 30% and 21% respectively. However, due to its large exposure to the more lucrative domestic market, profits from CRC sales formed the largest slice, representing 57% of net profits, followed by PPGI (24%) and GI (19%). The lower profit contribution by GI and PPGI was due to lower export margins stemming from intense competition on the international front.
Despite operating within a tightly regulated and cyclical industry, Ornasteel’s sales doubled from RM557 mln in 2001 to RM1.17 bln in 2004 and earnings staged a reversal from a net loss of RM8.12 mln to a profit of RM122.8 mln (see figure 2). While the improved external conditions provided the ideal backdrop for its earnings recovery, much of the turnaround is attributable to the input of its parent company, CSC, in key areas such as management, production and finance. Having invested RM13.3 mln to revamp its production lines to squeeze higher plant efficiencies, the operating performance of Ornasteel recorded significant improvements with EBITDA (earnings before interest, tax, depreciation and amortisation) margins more than doubling to 15.7% in 2003 from 6.7% in 2000 (prior to CSC’s takeover). Correspondingly, pretax and net profit margins also rose from 8.2% and 6.9% respectively in 2002 to 13.4% and 10.5% in 2004.
Ornasteel has net borrowings of RM163.8 mln, representing a net gearing level of 0.31 times. With strong annual operating cash flows (approximately RM100-120 mln) and no major capital expenditures on the horizon, the group’s gearing level is expected to fall to around 0.20 times by 2006.
As a pre-emptive move to protect its market share, Ornasteel has drawn out plans to expand its capacity and product range to cover thinner gauges (0.18 mm) of drawing and deep drawing quality coils presently satisfied by imports. With its 3 production lines running at full steam, future volume growth will hinge on its ongoing upgrading efforts to address potential production bottlenecks. Cost-wise, annual savings of approximately RM8 mln is envisaged with the successful substitution of LPG to natural gas for its furnaces.
Conclusion and Advice
At RM1.85, Ornasteel is capitalised at RM703 mln. For this, what do investors get in return? From afar, Ornasteel seems ideally positioned to prosper from the robust global demand for flat steel products. With the emergence of China, the recovery of the former CIS countries and Eastern Europe and the revival of Latin America and Asia, supply of high-grade flat steel is extremely tight with integrated steel mills running at full steam with full utilisation rates. This situation will be further exacerbated due to major scheduled maintenance works at key blast furnaces in the region during the first half of the year. The announced production stoppages could remove as much as 2.0 mln MT of high-grade sheets from the market, providing a floor to current steel prices. In addition, Asian steel mills are expected to raise prices for the 2nd quarter of 2005 on the back of cost-push factors such as the newly re-negotiated prices of coking coal and iron ore. Hence, barring a sudden sharp contraction in demand, prices for flat sheets will continue to exhibit strength leading to the 3rd quarter of 2005. In any case, if prices were to fall, the magnitude will not be severe domestically due to the existing import restrictions erected to protect the local steel industry.
On the other hand, despite the protracted delay, Megasteel has commenced trial runs on its cold rolling mill in Banting, Klang. When it eventually manufactures CRC commercially, the competitive dynamics of the industry will be altered to a large extent. Under the premise of soaking up excess capacity from its hot rolled plant, its new cold rolling mill has an annual rated capacity of 1.45 mln MT – enough to supply the entire local consumption. Assuming it is able to resolve its current production bottlenecks, Megasteel is capable of producing about 500,000 to 700,000 MT of CRC per annum within the first 3 to 4 years – an amount sufficient to take up the current slack locally. However, due to the slightly inferior quality of its HRC as a result of its use of steel scrap as opposed to virgin iron ore, the market segment that is most likely to be targeted in the initial stages is the pipe/tube makers. As it is, the HRC sourced from Megasteel are only used by Ornasteel as feedstock for rolling full hardness steel for galvanisers and some commercial grades for pipe and tube makers. When competition intensifies, margins from this segment of the market will inevitably fall and Ornasteel’s present pricing power will deteriorate. More worrying are the longer-term prospects of Megasteel, with the set-up of its direct reduced iron (DRI) plant, having the capability to supply high-grade sheets to the local market.
In the face of such daunting circumstances, Ornasteel, to its credit, remained focused and doubled its efforts to step up the value chain. By targeting the vast import-substitution market, the group could sidestep its rivals and avoid or delay the undesirable direct confrontations. Unlike its competitors, Ornasteel also possess the advantage of product diversity (GI and PPGI) to cushion shortfalls in demand and reduce its exposure to the potentially congested cold rolled segment. Furthermore, with the firm backing of its parent company, Ornasteel has the technical resources and marketing reach to re-jiggle its present client mix to stay ahead of the field.
From a valuation standpoint, Ornasteel is attractively priced at single-digit price earnings multiple for 2005, despite factoring in the increased competitive environment going forward. Nevertheless, due to the cyclical nature of the industry and the justified fears that the top is near, a more appropriate method of valuation is to discount the group’s average earnings over a period of time. For that and factoring in its dominant position in the market and the track record of its highly experienced and technically competent management team, Ornasteel is rated a medium term Buy at below RM1.80.
Dear Moolah & Kop,
I like to point out that your comment on Onasteel poor performance on stock investment may not be accurate bcos the investment is recorded based on 'mark to mkt price' in their books.
As for steel business I find Onasteel is excellent when u compare to Ajsteel,Hiap teck & Kinsteel which had risen drastically.
No doubt steel business is cyclical however if u decide to buy steel co then Onasteel is the best company u still can find now.
It wins hand down- in the strong balance sheet,good dividend,good earnings,good parent co.
