Period  2Q13/1H13

Actual vs. Expectations  Malaysia Steel Works (“Masteel”) 1H13 earnings of RM13.7m came in within our expectations and broadly within the consensus estimates, making up 47% and 44% of our and consensus’ full year forecasts, respectively.

Dividends  An unexpected single tier dividend of 0.5 sen was declared. (Masteel usually declares dividend in fourth quarter). However, it is still within our estimate of 1.5 sen.

Key Result Highlights  1H13, Masteel’s core earnings weaken marginally by 3% from RM14.1m to RM13.7m despite a slight improvement in operating margin (+0.3ppt) due to higher taxation as Masteel recognised lower taxfree expenses as compared to 1H12.

 YoY, Masteel’s core earnings decreased 47% to RM10.1m despite a marginal dip in revenue to RM342.3m of only 1% due to a compression in operating margin from 6% to 4% caused by higher cost of raw materials.

 QoQ, its revenue grew 4% from RM330.0m to RM342.3m underpinned by better demand from the local on-going construction activities especially ETP-related projects. Operating profit doubled from RM7.2m to RM14.5m as a result of improvements in margins while operating margin improved by 2ppt to 4% as a result of lower input costs.

Outlook  We expect a busy year for steel players, especially for Masteel given its smaller capacity compared to its peers. The demand for its steel billets and long products is expected to increase in tandem with the busier construction activities. However, we do not expect a significant increase in selling price due to persistent global oversupply.

Change to Forecasts  No changes to our earnings estimate.

Rating   Maintain MARKET PERFORM

Valuation  We maintain our Target Price of RM0.91 based on an unchanged 7x FY14 PER.

Risks  Volatile scrap prices and a subdued average selling price due to the global economic uncertainties.

 A lower plant utilisation in FY13.

Source: Kenanga