Masteel finally issued its FY14 audited accounts – the accounts were qualified by Nexia although UHY was satisfied with the classification of advance payments and found trade debtors properly supported following its special audit exercise. Downgrade to NEUTRAL (from Buy) with a lower MYR0.63 TP (from MYR1.16, 2% upside), as investors may adopt a more prudent valuation on the company after the incident.

FY14 accounts qualified. Yesterday, Malaysia Steel Works (Masteel) finally issued its FY14 audited accounts. Although without any adjustment, the accounts were qualified by its existing external auditor – Messrs Nexia SSY (Nexia).

Special audit clears accounting doubts. Masteel engaged UHY Advisory (KL) SB (UHY) to conduct an independent review of the issues after Nexia raised concerns with respect to: i) the treatment/classification of an amount due to a multinational commodity trader as trade deposits despite said trader continuously declining deliveries of the orders – which had triggered the repayment of the earlier deposit, and ii) the recoverability of MYR287.2m from its trade debtors as the relevant accounts receivable records contained a number of credit entries and other adjustments that looked like possible specific misstatements. After six week of special audit, UHY was satisfied that the classification of advance payments was in accordance with the Malaysian Financial Reporting Standards. Additionally, it believed the trade debtors under review were properly supported with the amounts due fully repaid in accordance with the agreed trade credit terms.

Downgrade to NEUTRAL, TP lowered to MYR0.63. The counter will remain suspended until further notice. Although UHY’s special audit managed to help clear doubts raised by Nexia, its accounts remain qualified. We expect Masteel’s impending 1Q15 results to be weak, thus share price will likely remain depressed upon resumption of trading, although downside may be limited. Thus, we decided to value the company at -2SD (from +2SD) of its 5-year historical trading range, arriving at a lower MYR0.63 TP. The new TP implies P/Es of 6.2x/4.3x/4.0x on FY15/FY16/FY17 EPS respectively. We downgrade the company to NEUTRAL (from Buy), as we think investors may adopt a more prudent valuation on Masteel after the incident.

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Source: RHB Research - 23 Jun 2015