Masteel’s  3Q14  slid into the red, but we deem its PBT just marginally below  our/street  estimates.  Maintain  BUY with  a  lower  TP  of  MYR1.26 from MYR1.31 (27% upside). We remain hopeful that its new rolling mill, adjacent  to  its  meltshop,  would  provide  solid  medium-term  earnings growth. However, a sudden provision for deferred tax liability prompted us to raise our tax rate assumption and cut our FY14 earnings estimate.

Tax shock in 3Q14. Malaysia Steel Works’ (Masteel) 3Q14 profit before tax  (PBT)  declined  67.9%  QoQ  to  MYR3.5m,  but  we  deem  it  just marginally below our/street estimates. We had expected  a weaker 3Q14 due to a scheduled shutdown at its meltshop for upgrading works around the  Hari  Raya  holidays.  It's  revenue  was  largely  flattish  despite  falling steel  price  but  higher  sales  tonnage.   That  said,  the  provision  for deferred  tax  liability  caused  its  effective  tax  rate  to  jump  to  276%  in 3Q14, thus pushing the company into a net loss for the quarter.  

New rolling mill to boost profitability.  Based on its past track record, Masteel  has  demonstrated  its  ability  to  stay  in  the  black  despite  poor steel market conditions. Meanwhile, it is installing  a  new rolling mill with a rated capacity of 200,000/tonnes per annum (tpa), which is adjacent to its  meltshop  in  Klang.  Once  production  commences  in  mid -2015,  the new  plant  should  be  able  to  boost  the  company’s  profitability.  This  is because Masteel has been selling its excess upstream volume as billet at  a  lower  margin,  or  outsource  the  rolling  process  on  a  profit-sharing basis with the re-roller. The new rolling mill next to its furnace may also reduce electricity cost as continuous casting is expected. 

Maintain  BUY.  Meanwhile,  Masteel’s  proposed  rail  project  in  Iskandar Malaysia  is  still  awaiting  various  approvals  from  the  g overnmentagencies.  Therefore, we prefer to focus  on its new rolling mill, which is progressing well and offers certainty to its medium-term earnings growth. We also expect  its  4Q14 results  to  regain momentum,  but  this  may only make up for  the shortfall at PBT level.  We  raised  our  FY14 effective tax rate assumption  to 38%  from 5%, which resulted in a 34.7% cut in  our FY14 net profit estimate, while our FY15-16 numbers remain unchanged.Accordingly,  we trim  our TP slightly to  MYR1.26  (from MYR1.31),  as we continue to value the company at  +1 SD of its historical trading range of 0.48x P/BV. Maintain BUY.

Source: RHB