Highlights

Background. Incorporated in Jan 1989 and commenced production since Jun 1990, Mycron Steel is the first cold rolled coil (CRC) manufacturer in Malaysia, with a total production capacity of 260,000 tonnes a year (see Figure 1).

Turned around since 4QFY12. Despite the challenging operating environment within the flat steel product segment, Mycron started to turnaround with an average quarterly core net profit of RM2m since 4QFY06/12 (from an average quarterly core net loss of RM1.7m for the first 9 months of FY12, see Figure 2), thanks to its focus on the high-quality cold rolled products segment, which in turn allows the company to import HRC (the feedstock) at competitive prices.

Moving forward… While we are maintaining our less-thanoptimistic view on the flat steel product segment’s outlook (on the back of higher energy cost and intense competition among local players and importers), we believe the company’s performance will likely sustain into the nearmedium term, underpinned by: (1) The average price spread between HRC and CRC remains wide at above US$90/tonne since 2QFY06/14 (see Figure 3), which in turn means sustained profitability, at least into 3QFY06/14; and (2) Its focus on the high-quality cold rolled products segment, which in turn allows Mycron to import feedstock (which is more competitively priced and better in quality).

Balance sheet. As at 31 Dec 2013, the company had net debt and net gearing of RM145.6m and 0.5x respectively.

Earnings Forecasts

We are projecting Mycron to achieve a core net profit of RM7.6-7.8m in FY06/14-16.

Catalysts

Earlier-than-expected recovery in the steel sector, resulting in a sector-wide re-rating including Mycron; and Price spread between HRC and CRC widens further.

Risks

• Volatile input prices;
• Price competition worsens;
• Inability to import HRC; and
• Inability to pass on higher energy costs to consumers.

Rating

Not Rated

Positives – (1) Commendable valuations; and (2) Niche product segment focus.

Negatives – (1) Volatile input prices; and (2) Share liquidity.

Valuation

Valuation at >60% discount to peers. At current share price of RM0.37/share, the stock is trading at P/B of 0.24x, at >60% discount to its peers’ average P/B of 0.65x (see Figure 4). Given the unjustifiable low valuations, we believe the company is worth a relook, particularly when earnings continue to sustain in the coming quarters. We value the stock at RM0.45/share based on 0.3x P/B (at 40% discount to CSC Steel’s current P/B given Mycron’s relatively smaller market capitalization).

Source: Hong Leong Investment Bank Research - 21 Apr 2014