Thursday 1 March 2012

MASTEEL (FV RM1.22 - NEUTRAL) FY11 Results Review: Hit by Strong 4Q Headwinds


Malaysia Steel Works (Masteel) posted a  4QFY11  net loss of RM13.3m that dragged down  the full-year profit  to significantly below our estimates. The award of ETP projects may have gained pace but the actual works could take time. Also, the delayed recovery of steel prices  points  to a slow start for 2012.  Using the same valuation parameter of 0.47x FY12 BV or the mean of the stock’s historical trading range, our  FV is reduced to RM1.22 after  factoring in the poorer  FY11 numbers despite leaving our projections almost untouched.  In light of all these setbacks and its limited upside potential, we downgrade Masteel to NEUTRAL.

In the red. After the pleasant surprise in the prior quarter, Masteel posted a net loss of RM13.3m in 4Q that dragged the full-year profit down to only RM24.4m. Even if we were to classify the RM4m investment impairment loss as a one-off exceptional loss, the end result still undershoots our original estimates significantly. We suspect the sharp plunge in the prices of iron ore, steel scrap and steel gave rise to a negative mismatch of lower selling prices and still-high raw material costs, as there is an inherent time lag before the latter starts to decline.

Awaiting  fresh catalysts. The implementation of “mega” projects under the Economic Transformation Programme (ETP) has been slow, but the momentum of project awards has been picking up. Nevertheless, it may take a while for actual works to  kick off and eventually  elevate the demand for physical steel. Meanwhile, with management intending to narrow the mismatch between higher upstream and lower downstream capacity, it continued to undertake  downstream  capacity expansion by allocating more than RM200m for the next  2–3 years.  Among others, its meltshop capacity is set to reach 650,000 tonnes per year (tpy) in 2012, while its rolling mill capacity will rise by 150,000 to 500,000 tpy in 2013. That aside, Masteel is also busy with a recently proposed JV with KUB to be a supplier and operator  of a 106.5km rail transit network linking Johor Bahru, Malaysia and Woodlands, Singapore. This is a new venture and obtaining the  necessary  approvals from  the  various government agencies may take some time and hence, we have not incorporated any contribution from this project.

Downgrade to NEUTRAL. The prices of long steel products appear to be on their way up, with China  expected to  bump up construction activities  as it enters the spring season. However,  this is outweighed by Masteel’s poor 4Q performance,  the  limited upside potential of its share price and the somewhat slow start to FY12 with the recovery of steel  prices taking longer than expected. With that, we  are downgrading Masteel to NEUTRAL with  its Fair Value tweaked marginally  lower to RM1.22 on the back of its poor FY11 performance. We value the company based on the mean of its historical trading range at 0.47x FY12 BV.

Source: OSK188 

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