FY05 net profit fell 67 per cent year-on-year to $5.4 million despite a 95 per cent surge in turnover to $341 million, dragged down by a sharp and prolonged decline in steel prices in 2HFY05, unrealised exchange loss of $1.8 million, $1.5 million provision for the diminution in value of its stake in Ferro China and a 180 per cent jump in interest cost to $5.7 million.

Gearing rose to 225 per cent in tandem with the greater trading volume. Fully diluted EPS fell a sharper 77 per cent to 3.4 cents due to an enlargement of share capital from its warrant issue. It has proposed a final dividend per share of 1.25 cents, translating to a yield of 5 per cent.

Trading income fell 45 per cent year-on-year to $10.8 million. Revenue from trading operations almost doubled to $312.9 million on higher trading volume. However, Ebit (earnings before interest and tax) came in at $10.8 million as margins fell from 12.4 per cent in FY04 to 3.5 per cent in FY05 as falling steel prices eroded returns.

Manufacturing contributions were similarly affected. Manufacturing revenue surged 78 per cent to $28.2 million. As with trading operations, Ebit declined 24 per cent to $2.5 million as margin fell to 8.8 per cent.

Medium term visibility still limited. Outlook remains cautious. While steel prices have stabilised over the past two months, the pace of recovery is still muted. However, demand for steel plates is anticipated to remain healthy in tandem with the buoyant ship repair industry. In addition, the group is set to enjoy a new revenue stream from its sandblasting plant, scheduled to be completed by 2H06. The pick-up in the construction industry will provide an added earnings boost.

Downgrade to 'hold' as valuation is not compelling. The stock is trading at 9.5x and 8x FY06 and FY07 earnings, in line with the 7-9x of other small cap stocks. While there appears to be no near-term catalyst for share price, downside is likely to be limited as the stock is trading at discount to its book NAV of 28.8 cents.

HOLD