Malaysia Steel Works - 2Q12 within expectations

Period    2Q12/1H12

Actual vs.  Expectations

 The 2Q12 results came in within ours and the consensus expectations.

 The 1H12 net profit of RM14m came in at 44% and 49% of our full year FY12 forecast and that of the consensus respectively. 

Dividends   No dividend was declared.

Key Result Highlights

 The 1H12 net earnings drop by 35% to RM14m despite a rise in the revenue by 11%. This was caused by expensive inventories in 1H12, which eroded the margins as compared to 1H11. To recap, the higher inventory cost was mainly due to stock-up activities as prices fell by 8% in 1Q12.     

 QoQ, despite a flat revenue, the bottom line turned profitable to RM19m due to better utilisation rate and lower cost of production. This was also supported by a higher selling price as demand picked up during the period. 

 YoY, the 2Q12 net earnings rose by 23% to RM19m on the back of a marginal increase in the revenue by 2%. This was attributable to a higher selling price as a result of stronger demand for steel products and the pick-up in construction works from 2Q12 onwards.

Outlook   In a separate announcement, Masteel announced that it had entered into a Joint Venture Agreement (JVA) with KUB to collaborate in the MCN project in Johor. To recap, Masteel will hold a 60% share in the JV and project is worth about RM1.3b. 

 Going forward, we expect further improvements in its earnings as we see Masteel benefiting from busier construction activities locally from 2H12 onwards.      

Change to Forecasts

 No changes in our FY12-13E estimates.

 

Rating  Upgraded to OUTPERFORM

We have upgraded our recommendation from MARKET PERFORM to OUTPERFROM due to the attractive capital upside (+30%) and the company’s better prospect of securing more orders in view of likely busier construction activities in the near term. 

Valuation    We upgraded our Target Price to RM1.25 (RM1.08 previously) based on 7x PER (from 6x) of FY13 EPS of 17.9 sen.

Risks   Volatile scrap prices.

 Lower than expected utilisation rate after the completion of its additional production capacity (180,000 MT) in CY13.   

Source: Kenanga