SSTEEL ... Jul10

S & P Recent Developments

• Southern Steel received a notice of mandatory takeover offer from Signaland Sdn Bhd (Offeror) for shares that the Offeror and Persons Acting in Concert (PAC) do not own. Signaland and PAC together own 70.2% of Southern Steel shares.

• Signaland is owned by Dr. Poh Soon Sim and Spectrum Arrangement Sdn Bhd (SASB), a wholly owned subsidiary of Hong Leong Company (Malaysia) Berhad. Signaland bought its 27% stake in Southern Steel
from Natsteel Holdings Pte Ltd (unlisted) on July 16, 2010 for MYR2.05 per share.

• Our earnings estimates are revised and the cash offer of MYR2.05 translates into 2010 PER of 7x (based on revised earnings), comparable to peer average but slightly lower than Southern Steel’s median PER of 7.5x (since 2007). On a P/B method however, the offer price fairly values Southern Steel at 1x, within peer average and the group’s historical median of 1x.

• We consider that the offer undervalues Southern Steel, given current prospects, considering that large domestic infrastructure projects could boost sales over the next 12 months, and while regional demand is
also robust, especially from Vietnam. We look for improved sales over the next 12 months, but risk to earnings remains from higher scrap prices - they have risen more than 30% YTD.

Recommendation & Investment Risks
• We maintain our Buy on Southern Steel with a lower 12-month target price of MYR2.35 (from MYR2.85) as a result of our reduced 2010 earnings estimate.

• Our target price is derived after ascribing a target PER multiple of 8x (unchanged) against our estimated 2010 EPS plus our estimated 2010 net DPS of 6.9 sen. Our target multiple is within peer and historical
averages. We believe 8x is a fair multiple as it is within the group’s minimum and average historical PER range (since 2007) of 4x to 13x.

• We believe shareholders may garner better returns if they continue to hold the stock, especially when large domestic projects are rolled out, which we expect toward end-2010 and into 2011. However, the cash
offer may limit share price performance in the near term.

• Risks to our recommendation and target price include volatile steel and raw material prices arising from uncertainties in the global environment, and slower-than-expected rollout of large domestic infrastructure projects.