Malaysia Steel Works (KL) - Springing Back to The Black

In 1HFY12, Malaysia Steel Works (Masteel) reported a profit of RM14.1m as it bounced back to the black in 2Q. We deem the results in line with our and street estimates although the annualized earnings are slightly ahead of our forecast. While steel demand may remain flattish in 2H and the execution of ETP projects may gain pace only after the impending General Election, the starting up of some ETP projects may help to keep local steel prices stable. Meanwhile, Masteel’s strict inventory policy may shorten the time lag to enjoy falling material costs. However, we are keeping our original estimates but upgrade our call to NEUTRAL despite some downside risk to our RM0.83 FV as we see the company out-perform its larger peers in 2H on a relative basis.

Commendable 2Q. Masteel posted a net profit of RM19.0m in 2Q, which was enough to pull the company out of the red, as a result of which it posted cumulative 1HFY12 earnings of RM14.1m. The simple annualised numbers were also slightly ahead of our and street estimates, but we deem the results in line. The improvement came from its steel manufacturing segment, which saw higher selling prices q-o-q even as the average material cost may have declined as scrap metal became cheaper. All said, EBITDA margin improved to 8.7% in 2Q compared to a mere 0.9% in 1Q.    

Keeping afloat in a choppy environment. The international steel market is likely to languish in 2HCY12 since steel prices are heading south again. Meanwhile, the rollout of “mega” projects under the Economic Transformation Programme (ETP) is expected to be protracted, at least until the General Election is held. Nonetheless, the initial start up of some ETP projects may sufficiently keep local prices stable while Masteel’s stringent inventory policy may also reduce the time lag in enjoying the drop in material costs. As such, we retain our original estimates for now. That said, the company is also busy with a recently proposed JV with KUB to supply and operate a 106.5km rail transit network linking Johor Bahru in Malaysia and Woodlands in Singapore. This being a new venture, the process of obtaining approvals from the various government agencies may take some time. Hence, we have not incorporated any contribution from this project.

Upgrade to NEUTRAL. The medium-term outlook for the steel industry remains challenging, especially with renewed concerns over Europe’s prolonged debt crisis. We also do not have high hopes on the company’s proposed rail project, more so considering that negotiations with the Government are likely to be long-drawn-out. Nonetheless, we upgrade our rating on Masteel to NEUTRAL, although there is some downside risk to our FV of RM0.83 as its 2H results are likely to beat its larger peers’. Our FV is based on a 0.33x FY12 BV, or -1.0 std of the stock’s historical trading range.

Source: OSK