We recently downgraded our rating for the South Korean steelmaker, POSCO(PKX: 103.76 +2.29 +2.26%), from Neutral to Underperform, primarily due to the company’s lackluster operating earnings guidance and concerns over rising raw material costs and increase in Chinese steel volume exports.Second Quarter Highlights
POSCO reported encouraging financial results for the second quarter of 2010, with net income increasing 117.5% year over year to KRW 1,196 billion (US$1.02 billion). However, compared with the first quarter 2010 results, net income plummeted 16.8%, primarily due to higher foreign exchange translation loss of KRW 443 billion (US$0.38 billion). Earnings per share were KRW 13,708 (US$2.93 per ADR) in the second quarter versus KRW 4,940 (US$0.96 per ADR) in the comparable quarter of 2009.
Consolidated net income in the second quarter was KRW 1,173 billion (US$1,004.5 million), up 174.7% year over year but down 19.2% sequentially. Consolidated EPS was KRW 13,444.1 (US$2.88 per ADR).
Revenue was KRW 7,933 billion (US$6.8 billion), up 25.0% year over year and 14.1% sequentially. The sequential growth was attributable to higher sales volume and sales price, which more than offset an 11.2% increase in raw material costs. Consolidated revenue in the second quarter was KRW 11,013 billion (US$9,431.4 million), up 23.4% year over year and 11.5% sequentially.
Production was 8.4 million tons of crude steel, a rise of 17.3% year over year and 1.6% sequentially. Sales volume was 7.8 million tons of finished products, an improvement of 11.7% year over year and 4.8% sequentially, driven by solid domestic demand and exports in emerging markets.
Outlook
POSCO remains confident of completing its facility additions and upgrades for capacity expansion in the second half of 2010. Also, the company is progressing well with its overseas investments in India. Global steel demand is expected to grow 12% in 2010 due to continued economic recovery.
For fiscal year 2010, POSCO expects consolidated revenue of approximately KRW 46.5 trillion (versus prior expectation of KRW 45.2 trillion) and consolidated steel production to reach 36,100 million tons. Sales volume is expected to be roughly 32.3 million tons and consolidated operating profit would be around KRW 6.2 trillion.
POSCO raised its investment target for 2010 to KRW 10.4 trillion from KRW 9.0 trillion. The company allocated roughly 4.9 trillion for domestic steel, 1.5 trillion for overseas investments and 4.0 trillion for new growth opportunities.
Downgraded to Underperform
POSCO remains well position to benefit from its expansion into the fast-growing markets over the long term. The company expects global steel demand to grow 12% in 2010 due to continued economic recovery, with domestic demand rising 16%.
Despite these positive drivers along with encouraging second quarter results, a lackluster operating earnings guidance due to higher raw material costs and an anticipated increase in Chinese steel volume exports for the second half 2010 played the spoil-sport. On the steel price front, POSCO’s steel prices will be challenged by the falling spot prices for steel in China due to declining domestic iron ore costs.
Moreover, financing of huge overseas investment plans will increase the company’s debt levels, which, along with risks from volatility in foreign exchange and the cyclical nature of the industry, will restrict share price performances. Prime competitors of the company include Arcelor Mittal (MT: 30.02 +0.37 +1.25%) and privately held Hyundai Steel Company.
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