Values emerged after share prices tumbled 44% from 52-wk high to RM0.78, as MASTEEL is only trading at 0.38x P/BV (64% below its peers) and 4.4x FY17 P/E (31% below its peers and 46% below 10Y average). Management is cautiously optimistic of a good FY18, leveraging of a firm steel prices (average RM2700/MT in 1Q18/RM2678 YTD vs 4Q17 of RM2490) as well as expecting accelerated pick up in demand from up-and-coming mega infrastructure projects.

Profile. MASTEEL is one of the biggest long steel manufacturers in Malaysia, producing steel billets and steel bars. The manufacturing facilities are located in Petaling Jaya and Bukit Raja, Klang with an annual capacity of 700k MT billets and 750k 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 . Besides, MASTEEL’s associate company which manufactures radioisotopes for the imaging of cancer cells had seen firm growth in revenue (FY17: ~RM4.6m vs FY14: ~RM1.4m). Its radioisotopes manufacturing facility is located in Bandar Enstek, Negeri Sembilan, supplying mainly to the hospitals throughout Peninsular Malaysia.

Cautiously Optimistic of FY18. Masteel is optimistic of a good FY18, leveraging of a firm steel prices (average RM2700/MT in 1Q18/RM2678 YTD vs 4Q17 of RM2490) as well as in anticipation of an accelerated pick-up in demand from up-and-coming mega infrastructure projects. Overall, steel prices are likely to remain strong on the back of: i) Malaysia’s government safeguard duties and (ii) firm China steel prices as ongoing capacity cutting measure to reduce 150m MT of steel production capacity by 2020 amid the continuing of anti pollution campaign.

Minimal Impact From US Steel Tariff. The steel tariff of 25% announced by Donald Trump’s administration in early 2018 is not expected to have a substantial impact on MASTEEL as it does not export to the US. The risk of the excess quantities, due to the above implementation, being offloaded at low prices in Malaysia’s market is low due to existing import duty of 5% and the additional safeguard tariff of 13.4%. The continuation of the safeguard duties until 2020 may stabilise earnings performance for the next few years.

Supply From China’s Integrated Mill in Kuantan Likely to be Well-absorbed. On the domestic front, the China-owned steel mill in the east coast is expected to commence production in 2H18. As substantial amounts of their production output are slated for export, management views that the remaining quantities are expected to be well absorbed by the local market, given the accelerated roll-out of various mega infrastructure/construction projects such as MRT3, LRT3, ECRL and HSR.

Capacity Expansion. With the installation and operation of the new equipment in 2018, MASTEEL will be able to increase its production of steel billets by 50,000 MT in 2018 and 100,000 MT in subsequent years. The anticipated improvement in the output will generate additional revenue of approximately RM100m, equivalent to an increase of 7% in revenue for the years ahead.

Pending a Downtrend Line Breakout. At RM0.78, MASTEEL is trading at 0.38x P/BV (64% below its peers) and 4.4x FY17 P/E (31% below its peers and 46% below 10Y average), respectively. After plunging about 50% from 52-week high of RM1.40 to a low of RM0.705, share prices staged a relief rally to end at RM0.78 yesterday, in tandem with a rebound in international steel prices and in anticipation of gradual pick-up in infrastructure projects. A decisive breakout above downtrend line resistance near RM0.805 will lift prices higher towards RM0.87 (23.6% FR) before reaching our LT objective at RM0.97 (38.2% FR and 200d SMA). Key supports are situated near RM0.74 (daily Bollinger band) and RM0.71 (100w SMA). Cut loss at RM0.705.

Source: Hong Leong Investment Bank Research - 4 May 2018