WE ARE raising our FY06 earnings estimates by 55 per cent to $9.5 million but maintaining our revenue projection of $367 million. This is to factor in the recovery in steel price towards the end of March, expected further improvement in steel price in the second half of the year, and the depreciation of US dollar. The rebound in steel price is anticipated to enhance HG Metal's margins significantly in FY06 by 2.4 pts to 10.8 per cent.

Demand for steel remains robust: The continued growth of the construction and offshore & marine sectors in Singapore is expected to fuel demand for steel this year. This view is supported by the International & Steel Institute, which expects global steel products to grow 4.5 per cent year-on-year to exceed one billion tonnes.

Supply getting tighter: Global supply of steel is likely to remain tight in 2006 and 2007, as the Chinese authorities are encouraging the consolidation of steel manufacturers. In addition, the central government has removed tax rebates from steel exports, thereby stemming the outflow of steel from China and underpinning the strengthening of the steel price.

Upgrade to 'buy': We are upgrading the stock from 'hold' to 'buy'. The stock is trading at an attractive multiple of six times FY06. Price-to-book ratio is at one time, on the lower end of the book value range of 0.95-1.5 times. Our salient concern about the stock would be the short earnings visibility and the volatility of stock price, but this has been factored into our valuation. Our six-month price target of $0.45 is based on 1.3 times FY07 BVPS of $0.35.

BUY