Period  1Q14

Actual vs. Expectations Malaysia Steel Works (Masteel) recorded 1Q14 core net profit (CNP)* of RM5.7m which made up 23% and 19% of our full-year forecast and consensus estimates, respectively.

 We deem the results as within expectations as 1Q14 tends to be a weaker quarter due to seasonally slower construction activity. Note that historically, 1Q contributed between 12% - 20% of full-year results in the last three years.

Dividends  No dividend was declared for the current quarter, as expected. For FY14E we expect to see total dividends of 1.0 sen per share implying 1% dividend yield.

Key Result Highlights YoY, 1Q14 earnings improved 84% to RM3.1m on higher operating margins (from 3.0% to 3.5% YoY) due to slightly better scrap prices and helped by improvements in production methods resulting in better steel yields.

 QoQ, CNP rose 18% to RM5.7m despite a mild decline (-4%) in revenues due to margin expansion (from 2.3% to 3.5%) and lower net interest expense (-14% to RM4.0m). Margin improved on better scrap prices and a lower-than-expected impact from the rise in electricity tariffs in January.

Outlook  While steel prices remain weak on a global level due to overcapacity issues, we expect to see Masteel’s sales volumes supported by good construction demand in the Klang Valley.

 We believe that Masteel’s planned capacity expansions expected for late-2014 to mid-2015 will favourably enhance FY15 revenue as well.

Change to Forecasts Maintain our FY14-FY15E CNP of RM24.5m-RM30.4m.

Rating Upgrade to OUTPERFORM (from MARKET PERFORM) From a valuation standpoint, it appears that the negatives have been priced into the share price, as Masteel is currently trading at 0.38x Fwd PBV which is nearly at -0.5x SD to its 3-year historical PBV. The stellar 1Q14 CNP growth of 84% YoY should serve as the nearterm catalyst. Note that this is the 3rd quarter of consecutive YoY CNP growth; after 4 consecutive quarters of YoY earnings decline (ie. 3Q12-2Q13) previously. At this level, the stock offers total return of 15% (Upside 14%; Dividend yield 1%). Consistent with our house ratings, we upgrade our recommendation with a total return exceeding 10%.

Valuation  We maintain our TP of RM1.14 based on 0.43x PBV to its FY14 BVPS of RM2.65. This reflects a +0.5 SD on 3-year historical PBV. We believe the premium is justified given Masteel’s favourable prospects as outlined above.

Risks to Our Call Weaker average selling price.

 Unfavourable scrap prices.

Source: Kenanga