Though  MSW’s  earnings  of  MYR3.6m  in  1QFY13  were  no  cause  for excitement, the market may regard it as an early indication of a possible turnaround  in  the  local  steel  industry.  We  believe  the  rollout  of  mega-projects  in  the  country  may  gather  steam  and  lift  steel  demand,  while new infrastructure and housing projects could boost market sentiment. In view of that, and investors’ escalating risk appetite towards high beta sectors, maintain Trading BUY, with a FV of MYR1.08.  

- 1Q  earnings  failed  to  excite.  Malaysia  Steel  Works  (MSW)’  1Q  net profit  of  MYR3.6m  represents  a  turnaround  from  the  losses  in  the preceding  year  and  a  q-o-q  improvement  of  11.1%,  although  the numbers  account  for  only  9%  of  consensus  and  10%  of  our  estimates. The satisfactory 1Q can be attributed to the price of scrap metal, which is lower  compared  to  the  relatively  stable  steel  bar  prices  in  the  domestic market. However, sales were lackluster during the period as contractors took long holidays during the Chinese New Year.

-  A  possibly  brighter  2H.  In  our  last  sector  update  on  20  May,  we  had revised up our earnings forecasts for MSW. Undeniably, our projection of a  turnaround  is  nothing  to  shout  about,  judging  from  the  degree  of improvement  in  the  company’s  earnings.  We  reckon  the  sector’s performance  in  1H was  partly  impacted  by  the  general  elections,  which cooled  the  implementation  of  most  mega-projects.  With  the  polls  now over  and  Barisan  Nasional  retains  control  of  the  Federal  Government, implementation of these projects may certainly regain momentum.

- Reiterate  Trading  BUY.  That  said,  a  possible  improvement  in  2H  and the  turnaround  in  1QFY13  could  pique  investors’ interest. The market’s risk  appetite  toward  cyclically  high  beta  stocks  further  prompts  us  to keep our Trading BUY recommendation on MSW. Our FV of MYR1.08 is based  on  0.4x  FY14  P/B,  or  the  mean  of the stock’s historical  trading range. We also make no changes to our original projections.

Source: RHB