Malaysia Steel Works (Masteel) reported a core net loss of RM27.4m for FY15 after stripping out RM23.6m in unrealized and realized foreign exchange losses. The results, which were also hit by weaker steel product prices and lower sales volume, were better than our FY15 estimated loss of RM31.9m as 4Q losses were narrower. No dividend was proposed for the quarter. We continue to maintain our Neutral call with an unchanged TP of RM0.40 based on a P/B multiple of 0.2x.

• 4QFY15 revenue (QoQ: -8.9%, YoY: -30%) Compared to 4QFY14, the Group’s topline dropped 30% to RM274.7m. The weaker numbers were mainly due to lower sales volumes and a further decline in steel bar selling prices, which have fallen more than 19% YoY to RM1,344/mt (4QFY14: RM1,659/mt). During the quarter, the company exported 5% of its steel products due to lackluster demand in the local market.
• 4QFY15 losses narrowed to RM3.4m. The company would have made a loss of RM3.4m in 4QFY15 compared to the RM4.5m profit in 4QFY14 after stripping out net foreign exchange gain of RM1.5m (unrealized FX gain: RM0.1m, realized FX gain: RM1.4m). At the operating level, the Group made a small gain of RM700k.
• Outlook. The current steel bar prices of RM1,300/mt are a challenge for all players in the industry as it is well below the break-even level of RM1,800/mt. Despite the challenging business environment, management targets a turnaround this year, driven by higher sales contribution from the new 150,000mt/year rolling mill as well as improved margins from the higher-premium steel bar products. On the plus side, the weak local currency has made China’s steel products less competitive compared to local steel products, somewhat alleviating some competitive pressures. All-in, the Group has a total of 700,000mt capacity for its upstream production with downstream standing at about 600,000mt.
• Gross gearing creeping up. Due to the losses incurred in FY15 and ballooning borrowings, the company’s gross gearing level has increased from 54% to 66%. The company may experience a liquidity squeeze should there be further expansions in the pipeline.

Source: PublicInvest Research - 25 Feb 2016