MSW’s 2Q13 earnings surged to MYR10.1m but annualized 1H earnings fell  short  of  our  and  street  estimates.  We  see  the  implementation  of mega-projects gathering steam, lifting local steel demand, while a weak MYR  presents  export  opportunities.  There  is  speculation  that  MSW’s proposed  rail  project  may  be  shelved,  which  would  relief  concerns  of potential hikes to its gearing. Upgrade to Trading BUY with MYR1.08 FV.  
 
- 2Q earnings jump. Malaysia Steel Works (MSW)’ 2QFY13 net profit of MYR10.1m  was  185.3%  higher  q-o-q  although  annualized  1H  numbers still  fell  short  of  our/street  estimates.  The  sharp  improvement  can  be attributed  to  lower  scrap  metal  prices  post  the  Chinese  New  Year celebration  compared  to  the  relatively  stable  steel  bar  prices  in  the domestic market.  

- Growing  local  and  export  sales.  With  the  polls  over  and  Barisan Nasional retaining control of the Federal Government, implementation of mega  projects  will  regain  momentum  and  steel  demand  is  expected  to improve anytime  now.  The  weak  MYR also  suggests that  there  is  room for MSW to raise exports, which have turned profitable, benefitting from its inventory piled up prior to the recent major weakening of the MYR.

- All  eyes  on  rail  project.  Business  Times  reported  early  last  week  that MSW’s proposed Iskandar rail project via a 60:40 joint venture with KUB Malaysia  (KUB  MK,  NR)  may  be  scrapped.  However,  MSW  said  it  has not received any notification from any Ministries and has been in primary discussions with banks on funding arrangements for the project.

- Upgrade  to  Trading  BUY.  MSW’s share price had  plunged  in  the  past two  weeks.  We  believe  this  is  due  to  a  combination  of  reaction  to  the broad market correction, speculation that its rail project may be scrapped and  our  recent  downgrade.  Rather  than  being  concerned  over  the possible scrapping of its rail project, we would be relieved if it happened, as  this  project  may  escalate  the  company  gearing  if  it  was  to  proceed. Therefore, we upgrade MSW back to Trading BUY (from Neutral) with an unchanged  FV  of  MYR1.08,  based  on  0.4x  FY14  P/BV,  or  the  mean  of the stock’s historical trading range. Also,  we  make  no  changes  to  our forecasts.   

Source: RHB