Twin Overseas Deals for POSCO ICT

South Korean steel maker, POSCO's (PKX - Analyst Report) IT unit, POSCO ICT is strengthening its foothold in the overseas market as the unit recently reported to have won contracts worth KRW180 billion. Overseas orders last year approximated KRW500 billion and accounted for 30% of total orders.

Of the contracts, the one worth KRW 120 billion requires POSCO ICT to set up a plant automation system at a CSP steel mill, with annual production capacity of 60 million tons in Brazil. The unit expects to receive another KRW80 billion orders in 2012.

POSCO ICT is also working on another plant in Indonesia in conjunction with Krakatau Steel; yet another contract worth KRW 57 billion, where the company is involved in the construction of a WTE power plant (25MW) in Haiti.

According to the World Steel Association, the world steel demand is expected to soar grow by 6.5% in 2011 and by 5.4% in 2012. But considering the financial crisis prevalent in the European region, political unrest in other parts of the world, the Japan earthquakes and economic uncertainty in China, demand growth is likely to be restricted. At the same time, high production levels are suppressing steel prices, while raw material prices are on the decline due to soft steel demands.

Consequently, the Korean steel market remains weak due to reduced demand from the automobile, shipbuilding and home appliance industries. To add to the peril, competition is increasing manifold for the company, especially from its peers like Arcelor Mittal (MT - Analyst Report) and Nippon Steel Corp. (NISTY.PK).

In the recently reported third quarter results, POSCO’s net income plummeted 78.5% year over year, primarily due to KRW 1.08 trillion foreign currency translation losses while revenue showed a 51.6% increase.

The current Zacks Consensus Estimate for the fiscal years 2011 and 2012 are $8.87 and $10.27, reflecting a year-over-year decline of 27.35% and growth of 15.78%, respectively.

We currently maintain a Neutral recommendation on the stock.

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