Neutral on PKX yet Again


We recently maintained a Neutral recommendation on Korea-based, POSCO (PKX), the world’s third largest steelmaker on the basis of output.

The company was incorporated in 1968 and is headquartered in Seoul, Korea. Ever since its inception, the company has been earning the reputation of producing the best quality steel and steel products through 143 companies out of its total 202 companies operating across the world.
Further, POSCO is making efforts to strengthen its foothold not only in its domestic market but also in international arena, especially in the fast growing and emerging markets worldwide. The company produced approximately 37.3 million tons of crude steel in 2011. Export ratio reached 39% in the same period.  

Moreover, higher proportion of value-added products like cold-rolled steel, automotive steel plates and electric steel sheets in its product mix work in favour of the company. Of the total, ending second quarter 2012, cold-rolled steel accounted for about 39%, automotive steel plate for 17% and electrical steel plate for 3%. With better realization and margins, these products will help POSCO leverage benefits and perform better than its peers. Also, the company has been increasing the use of cheaper raw material and reduced purchased-energy costs with an emphasis on cost saving which amounted to KRW 1,071 billion in 2012.

Notwithstanding the company’s solid long-term growth prospects, we prefer remaining on the sidelines for POSCO as near-term concerns and weaknesses weigh down these opportunities. POSCO’s second quarter 2012 results were disappointing and raised concerns over the company’s near-term performances. Net earnings in the quarter were down 66% year over year while revenue plummeted 3%. Higher cost of sales and expenses aggravated the problems and resulted in weaker margins for the company. Moreover, we are gravely concerned about global uncertainty and rising competitive pressure.   

Moreover, the outlook for the steel industry gets marred by occurrences taking place globally such as the financial crisis in the European region that seems to restrict demand growth. We also expect fluctuations in demand for steel products to continue in the near future, which may adversely affect the company’s businesses, results of operations or financial condition.

The Zacks Consensus Estimates for the years 2012 and 2013 stand at $7.61 and $8.66 per ADR, respectively. These reflect a year-over-year decline of 29.14% in 2012 and growth of 13.80% in 2013.  The stock currently has a Zacks #3 Rank, implying a short-term Hold rating while its nearest competitors Arcelor Mittal (MT) bears a Zacks #4 (Sell) Rank and Nippon Steel Corp (NISTF) has a Zacks #3 (Hold) Rank.

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