Good results but lowering estimates. SSH Corporation (SSH) reported its 2Q09 results with a 2% YoY fall in revenue to S$55.1m and a 27% YoY rise in net profit to S$5.5m. Revenue was lower than expected but net profit was within expectations, partly due to higher other operating income. On the whole, it was a good set of results given the difficult operating environment. Despite the fact that results are historically better in the second half of the financial year, we are lowering our FY09 revenue estimates by 8% in view of the challenging outlook ahead.

Effects of lower steel prices. According to the group, the softening steel prices may affect gross margins. Provision for stock write-down has also increased from S$0.8m in 2Q08 to S$3.1m in 2Q09 due to the fall in steel prices. Steel prices bounced a little after hitting the bottom at the end of last year and indeed the Baltic Dry Index (BDI) has risen recently as well but it is unlikely that the rally will sustain given that global economic recovery is not in sight yet. The suppressed BDI signals a lower demand for commonly shipped cargo like steel.

Marginal decline in leverage. The group's debt-to-equity ratio declined from 0.48x to 0.47x and has reduced its short-term borrowings to S$23.4m from S$31.6m in 1Q09. Long-term borrowings, on the other hand, rose from S$20.5m to S$30m. Even with the increased borrowings, finance costs fell due to lower interest rates, partly reflecting the group's creditworthiness.

Maintain HOLD. SSH has posted a good set of results given this difficult operating environment but margin pressure is likely going forward. There is also the possibility of an inventory write-down which should not be surprising since similar companies have also made provisions or have written down inventories. Given the challenging economic outlook and uncertain demand, we lower our estimates but maintain our valuation parameter of 2x blended FY09/10 earnings. Our fair value estimate eases to of S$0.11 (prev. S$0.12) but we maintain our HOLD rating for SSH.