Period  2Q14/1H14

Actual vs. Expectations Malaysia Steel Works (Masteel) recorded 1H14 core net profit (CNP)* of RM14.5m which came in within consensus expectations but above our expectations; at 52% and 59% of full year estimates, respectively.

Dividends  No dividend was declared for the current quarter, as expected. For FY14E we expect to see total dividends of 1.4 sen per share implying 1.3% dividend yield.

Key Result Highlights YoY, 1H14 CNP improved 6.3% to RM14.5m due to better volume sales and better operating margin (from 3.3% to 3.7% YoY) thanks to favourable scrap prices.

 QoQ, CNP jumped 59.2% on improved sales volume due to increased construction activity versus the previous quarter. Coupled with better scrap prices, margin also improved from 3.5% to 4.0%.

Outlook  Masteel’s sales volume should be supported by good construction demand in the Klang Valley and its manufacturing capacity expansions. Masteel plans to increase billet manufacturing capacity to 700k metric ton (MT)/year (+27%) by FY15E and its rolling capacity to 650k MT/year (+19-22%  yearly) by FY16E.

Change to Forecasts

 FY14E-FY15E CNP estimates are increased by 26%-14% to RM30.7m-RM36.1m, respectively, due to higher steel price assumption of RM1775-RM1920/MT (previously RM1735-RM1880/MT) and lower scrap price assumption of RM380-RM440/MT (previously RM420-RM470/MT).

Rating Maintain OUTPERFORM

Short-term upside is favourable due to Masteel’s stellar revenue growth potential and the improving steel industry outlook. We also note that Masteel is currently trading at 0.39x PBV which is its 3-year historical average PBV. Long-term catalyst should come from potential trade remedies on excessive Chinese steel imports that have artificially depressed prices. We believe the move should materialise by late-2014 or early-2015.

Valuation  TP is increased to RM1.22 (from RM1.14 previously) as we upgrade our valuation to 0.43x PBV (from 0.41x PBV previously) and roll over our base year to FY15E. The 0.43x PBV reflects a higher +1.0SD premium (from +0.5SD previously) due to Masteel’s improved earnings visibility. We expect better revenue growth of 9.5%-20.6% in FY14E-FY15E versus 4.8% in FY13 due to significant capacity expansion.

Risks to Our Call Lower-than-expected steel prices.

 Higher-than-expected raw material and electricity costs.

Source: Kenanga