SSH Corporation Ltd: Affected by further inventory provisions and low demand

Impacted by low demand, steel prices and provisions. SSH Corporation (SSH) reported a 13% YoY fall in FY09 revenue to S$217.6m and a 44% drop in net profit to S$15.5m as the group felt the impact of softer steel prices, lower demand and provision of inventories write down. Results were below expectations due to the inventory provision as well as lower revenue in the last quarter which made up 20% of our full year estimate. Excluding the write down of S$9.7m, gross profit margin would be about 26%, similar to that of FY08's. Although other income rose 98% YoY to S$6.4m due to increase in rental income, other operating expenses increased by 225% to S$3.9m due to an exchange loss of S$1.2m in FY09. We also note that gross gearing decreased from 0.48x as at 30 Jun 08 to 0.29x as at 30 Jun 09 as bank borrowings fell with lower working capital requirements.

Steel prices have likely bottomed out. As steel prices bottomed out in May this year and have recovered since, it is less likely that the group should require further provision for inventory write downs. Assuming adequate provision and if steel prices continue to recover, the group may book revaluation gains, but this will not be reflected in the income statement but rather in the revaluation reserve. Steel prices have trended upwards, supported by strong demand from certain countries such as China which have taken advantage of low prices to stock up on inventories. we see that China started experiencing a recovery in iron and carbon steel products imports from February this year, near the trough of the global composite steel price index. Although SSH mainly caters to customers in Singapore, Indonesia and nearby countries, there is the possibility that the group may expand its reach in the Chinese market since it can leverage on the network of KS Energy and Aqua-Terra Supply.

Maintain HOLD. Management expects that FY10 will remain "challenging and competitive" but pointed out that if the rise in oil prices is sustained, it may induce more oil exploration which increases the demand for SSH's products and services. We maintain our fair value estimate of S$0.16 as outlook remains murky with relatively low earnings visibility. As such, our HOLD rating remains.

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