Malaysia Steel Works (Masteel) remained in the red in 1QFY12 with a RM4.9m loss, thus missing  our and street estimates.  Nevertheless, its financial performance is likely to improve moving into 2Q in light of the widening spread between steel and scrap metal prices. However, steel demand could stay lackluster at least for 2H as the  execution  of ETP projects  may gain pace only after the General Election. As negotiations on the proposed rail project with government agencies may be longdrawn, we do not expect any immediate earnings contribution. We are keeping our NEUTRAL call on Masteel, with a FV of RM1.03, based on  the same valuation parameter of 0.41x FY12 BV, or  -0.5 standard deviation of the stock's historical trading range.

Still in the red.Masteel continued to  see red ink, posting with  a  1QFY12 net loss of RM4.9m, thus missing our and street estimates. We had anticipated that  the company would  return to the black in 1QFY12, although perhaps with weak results. The  weakerthan-expected numbers could be attributed to the persistently weak demand at steelmaking operations and timid  recovery in steel prices, especially  with the  Chinese New Year celebration resulting in the company's volume remaining flat. We also reckon that the group had not made any provisions for inventory impairment in the past two quarters and may be still stuck with some high-cost raw materials and is thus faced with negative spreads. 

Not enough short term kick. We are optimistic that the company's upcoming results will improve substantially, especially  with steel prices rising  q-o-q  and  average material cost trending lower as scrap metal gets cheaper. However, the rollout of 'mega' projects under the Economic Transformation Programme (ETP)  is expected to be  a protracted affair,  at least until the General Election is held. This aside, the company is also busy with a recently proposed JV with KUB to  supply and operate a 106.5km rail transit network linking Johor Bahru in Malaysia and Woodlands in Singapore. This  being  a new venture,  obtaining approvals from the various government agencies may take some time. As such, we have not incorporated any contribution from this project.

Maintain NEUTRAL.We had expected a short-term spurt in Masteel's earnings but remain cautious on the  medium-term outlook for  the  steel industry,  especially with renewed concerns over the ongoing  European  debt crisis. We had also  expected persistently  thin steelmaking  margins to dampen the company's performance for 2H12, which  is  largely reflected in our projections. Furthermore,  we do not have high hopes  on the company's proposed rail project, more so considering that negotiations with the government are likely to be long-drawn-out. Therefore, we keep our NEUTRAL rating on Masteel, with  a FV of RM1.03, derived from 0.41x FY12 BV, or  -0.5 standard deviation of its historical trading range.

Source: OSK