THE BUZZ
Malaysia Steel Works (KL) (Masteel) yesterday signed an off-take agreement with Amsterdam-based Trafigura Pte Ltd to supply 270,000 tonnes of steel bars and steel billets worth RM500m over a period of three years. The agreement was inked by Masteel managing director Datuk Seri Tai Hean Leng, and Trafigura managing director Dominic Watters. The signing was witnessed by Deputy International Trade and Industry Minister, Datuk Jacob Dungau Sagan.
OUR TAKE
Applause for off-take agreement. Masteel, the smallest integrated long steel manufacturer in Malaysia, focuses on the supply of steel bars to the domestic market. However, its export sales have increased from a mere RM76.4m in FY06 to RM434.3m, or 34.6% of total turnover in FY11, propelled mainly by Masteel's first off-take agreement with Stemcor Australia Pty Ltd signed in Oct 2009 for the export of RM120m worth of steel bars to Australia. The latest RM500m off-take agreement, expected to kick off from 2H12, is certainly timely as it can potentially boost the company's exports, particularly in the short to medium term, amid persistently sluggish demand in the domestic steel market. New trade partner Trafigura is the world's third largest independent oil trader and the second largest independent trader of non-ferrous concentrates. Given Masteel's size and Trafigura's experience in metals, this deal works in the former's favour in expanding its export reach.
Timely to take up new capacity. Masteel has been expanding its production capacity, with its upstream production poised to grow by 50,000 tonnes to 600,000 tonnes next year. The company is also investing about RM95m to construct a new 150,000-tonne downstream factory near its existing upstream meltshop in Bukit Raja in Klang. The construction of the plant, which will raise its capacity to 500,000 tonnes per year (tpy) from 2014, is expected to start in 2H2012 for completion in about 18 months. While we remain cautious on the gloomy outlook for the steel industry, we think steel demand may pick up after Malaysia's next General Election, which must be held before March 2013, with many Economic Transformation (ETP) projects expected to take off subsequently. Therefore, the off-take agreement will not only compensate for the short-term sluggishness in the local market but will also enable Masteel to optimize the utilization of its new production capacity, while waiting for domestic steel demand to pick up.
Maintain NEUTRAL. Despite the fact that the price of local steel bars is holding up well, we are wary that the recent sharp plunge in steel scrap price ' which has consolidated at USD450 but recently slid to USD400 a tonne ' may eventually cast a gloom over the steel market, and in turn adversely affect the prices of locally finished steel products. Furthermore, the latest off-take agreement only represents 15% of Masteel's annual sales while the actual margin is subject to the volatility in international steel prices. As such, we prefer to maintain our NEUTRAL recommendation on Masteel, at a fair value of RM1.03, based on a 0.41x FY12 BV, or -0.5 standard deviation of the stock's historical trading range.