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

Upgrade to trading buy at 98 sen with a target price of RM1.22: We visited Malaysia Steel Works (KL) Bhd (Masteel) last week and gather that its management is hopeful of riding on a long list of projects announced by the government.

After spending some RM60 million to RM70 million over the past two years to modify its furnace and billet caster, Masteel expects its billet capacity to progressively increase from 450,000 tonnes per year (tpy) to 650,000 tpy in FY12 by deploying in stages, 130mm billets instead of the original 120mm entities.

The company has also identified a plant near its existing rolling mill to embark on its downstream expansion. As the plant only requires minimum modification conversion to install a new rolling facility, the company has identified three machine suppliers from China to expedite the delivery of the required machines.

The management is targeting to increase its rolling capacity to 500,000 tpy upon full commissioning in FY12. It hopes this would be on time to ride on the string of public infrastructure and building projects announced by the government recently.

While we expect weak financial performance from steel mills in the second half of FY2010 (2HFY10), Masteel suggests that the company's sales is encouraging. Managing director/chief executive officer Datuk Seri Tai Hean Leng said the company had endeavored to import containerised scrap metal after the liberalisation of the scrap market since end-2008.

Although we are surprised at the possible increase in sales volume, we think Masteel might have benefited from being centrally located in the catchment areas of steel demand. Also being a smaller mill, the volume it produces is way easier for the market to absorb. We also suspect that its management might have accumulated enough experience in dealing with cheaper scrap imports by container, which are normally priced at about US$20 (RM61.80) discount compared to bulk imports.

Therefore, we are revising upwards our FY10 net profit estimates by 62.7% to RM42.4 million and FY11 numbers by 7% to RM47.5 million. As its earnings may exceed market expectation, we upgrade our call to Trading Buy, with a new target price of RM1.22. ' OSK Research, Nov 8


This article appeared in The Edge Financial Daily, November 9, 2010.