What is troubling me is the gross margin deteriorated from 20% to 12% YoY. Revenue increase by 106%, from Q2 '07 210 mln to 434 mln Q2 '08 but gross profit increased by 23% only, by right should be a lot higher.
The culprit is the cost increased was not fully passed on to customers.
The average prices of metallurgical coke, ammonium sulphate, crude benzene, tar oil, coal slime and middlings during the current quarter under review have increased by approximately 105%, 74%, 26%, 32%, 63% and 104% respectively compared with those of the preceding year corresponding quarter. However, the price of coal gas has reduced by approximately 16% in the current quarter compared to the same quarter last year.
Despite the seemingly favourable pricing of metallurgical coke and the majority of the byproducts as mentioned above, the price of raw materials (coking coal) has also increased quite significantly by an average of approximately 115% in the current quarter compared to the average prices registered in the preceding year corresponding quarter.
Many will argue that solid dividend yield of 4-5% based on 20% payout at single digit PE, must be very attractive. I will be careful not fall into dividend yield trap. Sometimes, stock price fall will wipe out dividend yield. A 20% loss in capital means, you need to wait for 5 years to recoup your capital.
The other point troubling me is the potential big fluctuation in earnings based on sensitivity study by ASEAMBankers. There could be potential more than 30% reduction in earning if there is an increase in coal price but not able to fully pass on the cost increase. If they managed to pass on the cost increase modestly, the earning enhancement is still less than 10%.
For steel related stocks, PE of 5-8 times is quite common, I will be willing to consider as an investment if the price goes down to $0.35-0.38 implying 40-50% margin of safety for high stake industry. Above that I don't think my principal safety is protected.