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