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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