As I have repeated a few times before, in order to beat the market, we have to think ahead and differently from everyone else.

At the beginning of the year, who would have thought that airline stocks like AirAsia, AAX or MAHB would be among the best performing in 2016? Most people wrote off these stocks which fell into a bottomless pit last year but how wrong were they now in hingsight?

I believe there are 2 main causes for poor investment judgement:

a) People follow a herd mentality: When something is out of fasion, people avoid it at all cost and when something is in fashion, they rush in usually at the end of the cycle.

b) People are either too lazy or unable to perform research or lack the foresight to determine positive changes in industries.

Today, I will be talking about Masteel. Yes, the steel industry has been one of the worst performing industries in 2014-2015 but could the industry be staging a massive rebound? I have high conviction that the answer is YES. Similar to aviation, this is one of the sectors that will perform well in 2016 and is just in the beginning stages.

Masteel is involved in the downstream segment of the steel industry producing steel bars for the construction sector. Steel bars are used in every facet of construction, from the reinforcement of concrete pillars, slabs, structures, tunnel lining to the foundation for buildings, roads and railroads. Masteel is vertically integrated, meaning it produces its own raw materials (steel billets) through the processing of scrap metal which is increasing in supply from countries like China, Japan and Korea making it cheaper to procure.

Now, let us have a look at the catalysts for this imminent rebound:

1) 4Q15 net loss narrowed to just RM2mil with management confident of turning a profit in 2016. For the past 5 years, revenue and net profit has been growing but dropped in 2014-2015 due to low steel bar prices due to concerns on China's growth. Removing foreign exchange gains/losses in 2015, the loss was only RM23.6m.

2) Steel bar prices are staging a very aggressive rebound after overblown fears of a China slowdown is abating now that China's policy makers have signalled stable, more sustainable growth. Moreover, demand for housing in China is on the rise indicated by increasing property prices in major cities which rose to a 2-year high. This higher demand which translates into higher consumption of steel bars is positive for steel prices to continue its upward trend. At its current levels, it is already 10% higher than 2015's full year average.

3) Capacity expansion of 150k MT of steel bars (increase of 33%) from 450k MT to 600k MT starting Oct 2016 is just in time for the RM28bn MRT2. At present, MRT projects already account to 20% of Masteel's sales. In addition, according to Public Investment, the cost of the new factory in Bukit Raja was RM120m, similar to Masteel's current market cap at only RM135m. This is absurd, it means that at Masteel's current price and market capitalisation, investors are only paying slightly more for the cost of its brand new factory leaving everything else for FOC.

4) Imposition of 5% import duty on cheaper available imported steel bars with potential for an additional 35% duty on imported steel bars. If implemented, it would be a game changer, making all imported steel bars uncompetitive and increasing demand for Masteel's steel bars. To help ensure the duties are effective, the government has a high level of surveillance and enforcement with raids conducted on steel importes to ensure the duty is paid.

An excerpt from their press release:

"Meanwhile, the Group is collaborating closely with the relevant regulatory bodies to ensure enforcement of the recently announced 5% import duty for steel bars (HS 7214), through swift identification and reporting of errant importers. This is expected to curb the rampant imports of substandard steel bars from China.

Additionally, the Construction Industry Development Board (CIDB) Act (Service of Notice) Regulations 2015, which was announced in June 2015, is anticipated to be enforced with effect from January 2016. The CIDB Act targets errant users of non-Malaysian Standard MS 146 steel bars, with each offence to be fined a minimum of RM50,000"

5) Masteel is currently trading at only 0.25x Price-to-book ratio. This is partly due to the delay in submission of audited accounts last year which led to a suspension. I believe this is a one-off event and not likely to be repeated thus creating an unfairly low and underinflated share price creating a buying opportunity. At minimum, Masteel should be priced at 0.4x price-to-book ratio, similar to its past 5-year average where MRT1 was rolled out. That would bring a fair valuation of RM0.88 (upside of 60%). This would also bring its share price back to level before the late submission of accounts in April 2015.

Excerpt from management from a newspaper article:

"On the accounting hiccup it experienced earlier this year, Tai said UHY FLVS Sdn Bhd had conducted an independent and comprehensive review of the issues raised by its previous auditor Nexia SSY and that the board of directors had agreed to the positive findings of the UHY report.

“That was in the past. We think the present and future is more important and our focus is to bring the company forward,” he said."