MASTEEL (FV RM1.07- NEUTRAL) Corporate News Flash: Rail Project Derailed?

Stock Name: MASTEEL
Company Name: MALAYSIA STEEL WORKS (KL)BHD

Research House: OSK

Price Call: HOLD

Target Price: 1.07

THE BUZZ

Over the weekend, StarBiz quoted Iskandar RegionalDevelopment Authority (Irda) CEO En Ismail Ibrahim  as saying that  the  Federal Government  has yet to  decide  on the operator of the multi-billion ringgitintra-city commuter train (ICCT) service for Iskandar Malaysia. He saidthat  although Metropolitan CommuterNetwork SB (MCN) proposed the rail network, the project is not exclusive to MCNand is still open to other companies. Irda is still accepting new proposalsfrom other interested parties, he added. En Ismail also clarified that theJohor state government and Irda are not involved in the project in any way asthe final decision lies at the Federal level.

OUR TAKE

A quick recap on therail project. On 19 Jan 2011, Malaysia Steel Works (Masteel) and KUBMalaysia Bhd (KUB) announced that they will be entering into a Heads of Joint-Ventureagreement to form a JV company, MCN, which proposes to supply to and operatea  106.5km  rail transit network in Iskandar Malaysia andWoodlands in Singapore. The project cost is estimated at RM1.35bn. Under theproposal, seven new stations will be built along the route, together with 16halts. The proposed rail network will also include a shuttle service from JBSentral to Woodlands in Singapore.

Long approval processexpected. As we had earlier anticipated negotiations on concession-typeprojects to be protracted, particularly since this one is the first in kind in thecountry, it would obviously require many rounds of deliberation before theproject is firmed up. Hence  we are notsurprised to learn that  theproposal  is  still awaiting  the green light from the Federal  Government. We reckon that the JV company,being the only one that has submitted a proposal for the commuter project,stands a good chance of winning the concession. However, as we have notincorporated any contribution from this project, the delay in approval willhave no impact on our estimates.

Maintain NEUTRAL.While we  expected  the approval of  the proposed rail project to takesome time, we are  nevertheless  disappointed with the  slow pace of recovery  in steel prices. In viewof the soft prices, we are lowering our book based valuation to 0.41x FY12 BV,or  -0.5 standard deviation of thestock's historical trading range, which trims our Fair Value to RM1.07,although  our NEUTRAL recommendation onMasteel is maintained.

Source: OSK188

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

Stock Name: MASTEEL
Company Name: MALAYSIA STEEL WORKS (KL)BHD

Research House: OSK

Price Call: HOLD

Target Price: 1.22

Malaysia Steel Works (Masteel) posted a  4QFY11 net loss of RM13.3m that dragged down the full-year profit  tosignificantly below our estimates. The award of ETP projects may have gainedpace but the actual works could take time. Also, the delayed recovery of steelprices  points  to a slow start for 2012.  Using the same valuation parameter of 0.47xFY12 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 projectionsalmost untouched.  In light of all these setbacksand its limited upside potential, we downgrade Masteel to NEUTRAL.

In the red. Afterthe pleasant surprise in the prior quarter, Masteel posted a net loss of RM13.3min 4Q that dragged the full-year profit down to only RM24.4m. Even if we were toclassify the RM4m investment impairment loss as a one-off exceptional loss, theend result still undershoots our original estimates significantly. We suspectthe sharp plunge in the prices of iron ore, steel scrap and steel gave rise toa 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 beenslow, but the momentum of project awards has been picking up. Nevertheless, itmay take a while for actual works to kick off and eventually  elevatethe demand for physical steel. Meanwhile, with management intending to narrowthe mismatch between higher upstream and lower downstream capacity, itcontinued to undertake  downstream  capacity expansion by allocating more thanRM200m for the next  2'3 years.  Among others, its meltshop capacity is set toreach 650,000 tonnes per year (tpy) in 2012, while its rolling mill capacitywill rise by 150,000 to 500,000 tpy in 2013. That aside, Masteel is also busywith a recently proposed JV with KUB to be a supplier and operator  of a 106.5km rail transit network linkingJohor Bahru, Malaysia and Woodlands, Singapore. This is a new venture and obtainingthe  necessary  approvals from  the various government agencies may take some time and hence, we have notincorporated 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 startto 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 FY11performance. We value the company based on the mean of its historical tradingrange at 0.47x FY12 BV.

Source: OSK188 

MASTEEL - Slow start to 2011 for Masteel after strong 4QFY10

Stock Name: MASTEEL
Company Name: MALAYSIA STEEL WORKS (KL)BHD
Research House: OSK

Malaysia Steel Works (KL) Bhd
(May 30, RM1.23)
Maintain neutral at RM1.29 with target price of RM1.34: After beating its bigger peers in the preceding quarter, Masteel started 2011 with feeble earnings, posting a net profit of RM6.2 milllion, 53.4% lower quarter-on-quarter despite being almost flat year-on-year.

We suspect the low inventory level of less than two months as at end-December 2010 may have limited the benefits of the time lag of cheaper feed materials compared with its competitors, which keep more stocks as most of the raw material in 1Q was marked to the current market price, which has been surging since early 2011.

Therefore, earnings before interest, tax, depreciation and amortisation (Ebitda) margin slipped to only 5.3% despite escalating average selling prices (ASPs). Also, the Lunar New Year celebration in February resulted in 1Q revenue dropping by 4.6%.

Our observation suggests that activities in the local steel market remain lacklustre. Although steel demand usually picks up during the April to June period, we think this is a sign that the implementation of various mega projects introduced under the Economic Transformation Programme (ETP) remains slow.

Nonetheless, as Masteel's earnings record in the past may have showed a less consistent trend compared with its peers', we prefer to monitor the company's earnings for another quarter or two before altering our original projections. This is despite the 1Q numbers coming behind our and street estimates when annualised.

We also have some reservations on the company's recent announcement of a 60:40 joint-venture agreement to supply to and operate a 106.5km rail transit network in Iskandar Malaysia and Woodlands in Singapore.

While the Johor government and the co-chairman of Iskandar Regional Development Authority endorsed the proposal in April 2011, the company is still in the process of acquring approvals from various government agencies, which we think may take a while.

Hence we have not incorporated any earnings contribution for this project.

With the company's medium-term earnings visibility remaining poor, plus the unexciting 1Q figures, we maintain our 'neutral' rating on Masteel with a fair value of RM1.34. ' OSK Research, May 30


This article appeared in The Edge Financial Daily, May 31, 2011.

MASTEEL - CIMB Research sees iron-clad prospects for Malaysia Steel Works

Stock Name: MASTEEL
Company Name: MALAYSIA STEEL WORKS (KL)BHD
Research House: CIMB

KUALA LUMPUR: CIMB Research sees iron-clad prospects for Malaysia Steel Works (KL) Bhd which is on an expansion programme that is set to double its earnings to RM80m-RM90m by FY12, lowering its FD P/E to below 5 times or 60% below the KLCI P/E.

CIMB Research said on Monday, April 11 the target is achievable as it is expanding capacity to meet rising demand from property launches and ETP infrastructure project starts.

'On P/NTA basis, the stock is cheap at 0.6x CY10, 40% below the sector. We value Masteel at 10.2x forward P/E, 30% below our 14.5x target market P/E. This works out to RM2.95, more than double its current price,' it said.

The research house said Masteel's valuation discount is wider than Ann Joo's 10%. Should it succeed in its bid for the Iskandar rail project, FY12 FD core EPS would rise by 29% to 37.4 sen, implying a value of RM3.80 or hefty upside of 170%.

MASTEEL - OSK Research keeps Neutral call on Masteel

Stock Name: MASTEEL
Company Name: MALAYSIA STEEL WORKS (KL)BHD
Research House: OSK

KUALA LUMPUR: OSK Research is keeping its Neutral call on Malaysia Steel Works (KL) with a fair value of RM1.34, derived from 6x PER and 0.59x P/NTA on FY11 figures.

It said on Friday, Feb 25 it was happy to see Masteel's bread and butter steelmaking business continue to beat its bigger peers, posting a core net profit of RM42.2m in FY10, which was well within its estimates but above consensus.

'While we are upbeat on earnings for 1HFY11, we remain cautious of its outlook beyond six months and the investment risk from its newly proposed rail transit project in the south of Peninsular Malaysia,' OSK Research said.

MASTEEL - Masteel: All eyes on rail project

Stock Name: MASTEEL
Company Name: MALAYSIA STEEL WORKS (KL)BHD
Research House: OSK

Malaysia Steel Works (KL) Bhd
(Jan 26, RM1.28)
Downgrade to neutral at RM1.30 with revised higher target price RM1.33 (from RM1.22): On Jan 19, Malaysia Steel Works (Masteel) and KUB Malaysia Bhd announced to Bursa Malaysia that they will be entering into a heads of joint venture agreement to form a JV company that has proposed to supply to and operate a rail transit network within Iskandar Malaysia and Woodlands in Singapore spanning some 106.5km.

The project cost is estimated at RM1.35 billion. We attended the briefing on Jan 21, during which Masteel managing director Datuk Seri Tai Hean Leng updated analysts and fund managers on the latest developments.

Undoubtedly, implementing the proposed rail transit network will ease traffic congestion, improve the existing public transport infrastructure and act as a backbone for efficient commuting in Johor Baru, especially within the Iskandar development region. Nonetheless, we do not see any immediate earnings contribution as we expect discussions with the relevant authorities to take time.

Negotiations on the concession-type project, particularly since this is the first of its kind in the country, will obviously require many rounds of deliberations before being firmed up. Tai hopes discussions can be completed by end-2011, and the rail transit system to be ready for operation no later than 2013.

As infrastructure and public transport are new areas of endeavour for Masteel, it would be fair for us to assume greater investment risk. We prefer to monitor the developments before incorporating this project into our earnings model.

However, we are happy that the earnings from the company's bread and butter steelmaking business have beaten its bigger peers. As its 3QFY10 core numbers were exceptionally strong, we see reasonably good 4Q earnings, albeit a bit lower quarter-on-quarter.

As we think investors will appreciate the commendable earnings from its core business, we bump up our target PER by a notch to six times from five times but retain our price-to-net tangible assets ratio of 0.59 times based on FY11 numbers. This raises our fair value to RM1.33.

However, as the share price has run ahead of the proposed rail project and now offers limited upside to our new fair value, we downgrade Masteel from 'trading buy' to 'neutral'. ' OSK Investment Research, Jan 25


This article appeared in The Edge Financial Daily, January 27, 2011.