• Company profile. MASTEEL (listed in Feb 2005) is one of the biggest long steel manufacturers in Malaysia, which is involved in the manufacturing of steel billets and steel bars. Its manufacturing facilities are located in Petaling Jaya and Bukit Raja, Klang, housing an annual capacity of 700,000 MT billets and 600,000 MT steel bars, respectively. It has over 60 domestic dealers and several international trading houses as partners in Australia, New Zealand, Indonesia, Singapore, Thailand, Vietnam and the Philippines. In FY16, exports accounted about 8% to revenue.

• MASTEEL also has an associate company which manufactures radioisotopes for the imaging of cancer cells. This company has seen rapid growth in revenue from c.RM1.4m in FY14 to c.RM3.3m in FY16. Its radioisotopes manufacturing facility is located in Bandar Enstek, Negeri Sembilan, supplying mainly to the hospitals in Peninsular Malaysia.

• Anticipate a strong 3Q17 results. For the upcoming 3Q17 results, market is anticipating steel rebars companies such as MASTEEL to perform better, taking cue from strong local steel rebars and expanding margins, as rebar prices hit multi-year high at RM2700/tonne levels in Sep before retracing to RM2450 currently while overall raw material prices remain muted (FIG4). Overall, steel prices are likely to remain strong, buoyed by gradual roll-outs of mega infrastructure projects, Malaysia’s government safeguard duties coupled with stable China rebar prices (FIG3) following a confluence of factors, i.e. stable demand, capacity cuts and policies to reduce pollution.

• Downside limited. On the back of profit taking activities after the announcement of proposed 24.3m private placement and the listing of 53.9m bonus issues on 29 Sep, MASTEEL share prices retreated 17.7% from a 52- week high of RM1.41 on 18 Sep to a low of RM1.16 (26 Sep) before ending at RM1.24 last Friday. At RM1.24, MASTEEL is trading at 0.66x P/BV (based on enlarged shares) and 8.3x FY17 P/E (FIG1), which are 55% and 16% below its peers (refer FIG2), respectively. We see limited downside risks amid undemanding valuations and early signs of bottoming up in technical indicators. A successful downtrend line breakout above RM1.29 (also the 50% FR) will spur prices higher towards RM1.35 (76.4% FR) before reaching our LT target at RM1.47 (123.6% FP). Key supports are situated near RM1.19 (3 Nov low) and RM1.16. Cut-loss at RM1.15.

Source: Hong Leong Investment Bank Research - 6 Nov 2017