PERWAJA - We Went, We Saw, We Liked (OSK)

Last week, we visited Perwaja’s existing steel and iron-making plants, and a private iron ore mine in Terengganu. We also witnessed the progress of clearing works at the company’s new iron ore concentration and pelletization plant, which is scheduled for commissioning in 1HFY12. Although we only expect this plant to pull Perwaja out of the red with our conservative assumptions indicating a fair value of RM1.05, we are now optimistic that bagging an iron ore mining concession would lift our blue-sky DCF FV by a further RM4.15. However, as we expect this valuation improvement to be progressive, we are keeping our Trading BUY pending an official announcement.

Blue sky RM4.15/share for iron ore mine. As the local cost of mining iron ore is less than USD50 a tonne vs the current iron ore selling price of above USD160 per tonne, any mining concession would certainly be lucrative. Our back-of-envelope calculation shows that an iron ore concession may translate into additional DCF valuation of RM4.15 a share. Although we see only gradual attainment of this money-spinning valuation, we remain upbeat that an award of a concession will translate into a FV of above RM2.09 compared with our present valuation of RM1.05. Trading BUY maintained.