Period  4Q13/FY13

Actual vs. Expectations Malaysia Steel Works (Masteel) recorded FY13 earnings of RM28.8m which was below consensus and within our estimates, making up 91% and 99%, respectively.

Dividends  No dividend was declared for the current quarter, as expected.

Key Result Highlights FY13, Masteel recorded 21% growth in earnings from RM23.9m to RM28.8m on the back of 5% revenue growth. The increase in revenue was largely due to better sales volume in the domestic market, from RM1.1b in FY12 to RM1.3b in FY13.

 YoY, 4Q13 earnings grew 98% from RM2.7m to RM5.4m on revenue growth of 12% (RM352.0m in 4Q13 against RM315.2m in 4Q12). Gross profit margins improved from 1.8% to 3.1% on better manufacturing efficiency.

 QoQ, revenue remained largely unchanged from RM351.2m to RM352.0m, while net profit fell 44% to RM5.4m with the decrease in margins due to higher production cost, as average prices of scrap - a key raw input for steelmaking - increased an average of 2.7% monthly through 4Q13.

Outlook  We remain cautious on the outlook for the steel industry due to volatile scrap prices. Management expects production cost pressures, particularly in energy related expenses, to impact margins and we are uncertain whether prices can be adjusted accordingly amid global pricing pressures.

However, we believe that Masteel’s planned capacity expansion expected for mid-and-late-2014 will favourably enhance its FY15 revenue, as domestic demand remains strong on ongoing and planned government projects.

Change to Forecasts We are revising downwards our FY14 net profit estimate to RM23.5m, which accounts for: (i) increased electricity costs, (ii) depressed average selling prices expected to persist in the near term, and (iii) rolling mill production capacity expansion slated to begin operations in mid-2014.

Rating Maintain UNDERPFORM

 Although we like MASTEEL for its consistent earnings despite the challenging operating environment, we reiterate our UP call on MASTEEL given the limited share price upside to our new TP of RM1.14.

Valuation  Despite our downgrade in earnings, we are upgrading our TP of RM0.91 to RM1.14 as, given the continued volatile steel selling prices, we have switched our valuation from 7x FY14 PER to 0.5x FY14 PBV to be inline with other steel players under our coverage.

Risks to Our Call Better average selling price.

 Favourable scrap prices.

Source: Kenanga