Steel stocks have gained 18.3% since our last sector upgrade, but are still lagging behind the broad market. We believe earnings may recover as the rollout  of  mega  projects  gathers  steam  while  new  infrastructure  and PR1MA  housing  projects  boost  market  sentiment.  We  also  see  policies favoring  the  local  steel  industry  post-BCG  study.  Together  with  news  of M&As  and  an  imminent  iron  ore  deal  may  resurface,  we  are  still OVERWEIGHT on Malaysia’s steel sector.

- Steel  earnings  may  rebound.  Our  newly-revised  numbers  indicate  that steel players may significantly turn around although their absolute profit will remain  unexciting  and  visibility  low.  Nonetheless,  we  think  any  turnaround should  pique  investor  interest,  especially  since  the  local  stock  market  is running short of investment ideals, especially with key index and blue chip counters mostly trading at their historical highs.

- Infrastructure spending a main driver. We are heartened by the number of projects currently in progress vs those which nearing completion or were recently  handed  over.  Barisan  Nasional  (BN)’s  renewed  mandate  may quicken  the  speed  of  project  implementation.  It  also  pledged  to  continue with  the  Economic  Transformation  Programme  and  upgrade  infrastructure. A  recent  StarBiz  speculated  the  construction  of  MRT  Line  2  may  proceed as planned. BN has committed to build one million affordable homes, which may offset any slowdown in private development. 

- Future  roadmap  to  be  more  favourable.  Last  year,  the  Ministry  of International  Trade  and  Industry  (MITI)  hired  Boston  Consulting  Group (BCG)  to  undertake  a  study  on  the  local  steel  sector’s woes.  This  led  to MITI  revoking  the  duty  exemption  on  18  grades  of  imported  steel.  We believe  this  is  just  the start of  measures  to  protect the local  steel  industry. The  Government  also  slapped  an  anti-dumping  duty  on  wire  rods  for  five years, which brought some relief to local producers. We also think they may be some good news pending from the Malaysian Steel Council.

-  Iron ore deals & M&As heat up. As BN has retained control of the federal government  and  the  state  of  Terengganu,  talk  of  iron  ore  deals  may resurface.  We  think  Perwaja  (TRADING  BUY/FV  MYR0.60)  and  Eastern Steel  SB  (55%-owned  by  HTVB  (TRADING  BUY/FV  MYR0.59)  are frontrunners for mining rights, especially since a new plant and furnace are to  be  commissioned  soon.  We  also  understand  Lion  Industries  (BUY/FV MYR1.49) is still in talks to sell its steel assets.

Source: RHB