Malaysia Steel Works (KL) (Masteel) painted a bullish picture at its analysts/fund managers briefing on Wednesday. It expects sales tonnage to grow, especially since its meltshop is being upgraded and capacity will increase with its upcoming new rolling line. However, we see profits remaining volatile, especially in view of plunging steel prices. This aside, progress on its proposed rail project in Iskandar Malaysia is slow despite firm commitment from the management. We are keeping NEUTRAL on Masteel, with our RM0.83 FV based on a 0.33x FY12 BV, or -1.0 SD of the stock’s historical trading range.
Capacity on the rise. Over the years, Masteel’s management has been focusing on modifying its furnace and billet caster to progressively increase billet capacity. Group MD/CEO Dato’ Seri Tai Hean Leng told the briefing that the latest upgrade on the company’s meltshop will see its upstream capacity increase by another 50,000 tonnes to 600,000 tonnes per year (tpy) by end-2012. Meanwhile, the company is also taking steps to address the mismatch between higher upstream and lower downstream capacity by undertaking capacity expansion. For this purpose, it has allocated RM100m for 2013 to be directed at its new rolling mill adjacent to its meltshop in Butik Raja, Klang. This new line will raise its rolling mill capacity by 200,000 to 550,000 tpy from FY14 onward. We reckon that these investments will provide room for the company to expand sales as its existing plant is now running at almost optimum capacity.
Bottomline still patchy. Despite the bullishness over the company’s growing tonnage, there has been no firm guidance from its management on upcoming profits. This is understandable given that steel prices are heading south again. We expect the rollout of mega projects under the Economic Transformation Programme (ETP) to be long-drawn, at least until the General Election is held. Although the initial commencement of some ETP projects may be sufficient to keep local prices relatively strong than the international spot price, and Masteel’s stringent inventory policy may help to reduce the time lag for it to enjoy lower material costs, we do not foresee any major surprises in the company’s profits in the medium term, particularly in 2HFY12. That said, we are keeping our original forecast of lower 3Q earnings, with a potential rebound in 4Q.
Rail project progressing, but at a slow pace. As we have had reservations on the company’s JV to supply to and operate a 106.5km rail transit network between Iskandar Malaysia and Woodlands in Singapore, we are not surprised with the lengthy time taken to obtain the necessary government approvals. The management is fully committed to this project, but negotiations on such concession-type projects, particularly since it is the first of its kind in the country, will obviously require many rounds of deliberation before it is firmed up. As infrastructure and public transportation are new areas of endeavour for Masteel, we see the company facing greater investment risk. As such, we prefer not to incorporate any potential earnings contribution from this project.
Source: OSK
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