• FV of MYR0.59 based on 5.5x FY24F P/E. TSA Group plans to raise MYR42.5m from its IPO, primarily for capital expenditure related to its new manufacturing plant, working capital, repayment of bank borrowings, and listing expenses. We forecast a 3-year earnings CAGR of 1.2%. However, in the long run, the 5-year CAGR could be c.10%, post commencement of its Semenyih manufacturing plant, as we envisage further cost-savings with TSA having more control on the quality and availability of cold-rolled stainless steel coil.

• A one-stop supplier for various products. Aside from being a supplier of stainless steel rolled metal products, which made up 53% of its 8M23 revenue, TSA supplies other metal products like copper, aluminium, and carbon steel in the form of pipes, channels, and angles. The group has also been manufacturing stainless steel pipes for the past 15 years. TSA is geographically diverse, deriving revenue not just from Malaysia, but also from Singapore, Thailand, Bangladesh, China, and India, among others.

• Prospects. Despite the temporary blip we are expecting for FY23F – mainly due to lower ASPs for most of its products – we expect demand to pick up from various industrial fronts as its clients comprise fabricators, contractors, and part manufacturers that make up 47%, 8%, and 15% of revenue. This ties well with RHB Economics’ higher GDP projection of 4.6% YoY in 2024 (2021: 4.1% YoY) for Malaysia with private investment activities to be buoyed by business-friendly policies, while public investment may expand further amid the continuation of development projects.

• Major plans. TSA plans to establish a manufacturing facility for stainless steel cold rolling in Semenyih, on a 435.6k sq ft land. Production of coldrolled stainless steel coils is a new business for the group, and it will have a capacity of 4,000 tonnes per month on top of its annual capacity of 7,722 tonnes pa for the manufacturing of stainless steel pipes. TSA currently purchases cold-rolled stainless steel coils from third-party suppliers. The new facility should help TSA improve its inventory management.

• Forecasts. We estimate TSA’s core earnings will drop by 44% YoY in FY23F before expanding by 51% and 23% YoY in FY24-25F amidst more stable ASPs and stronger demand for steel products. Likewise, net profit margins are expected to grow to 10% in FY25F from 6.4% in FY23F.

• Valuation. We ascribe a MYR0.59 FV based on 5.5x FY24F P/E. For peer comparison purposes, we chose companies that are involved in the trading of steel-related products and also the manufacturing of such related products. The target P/E is c.35% below the blended 8.6x FY24F P/E of the selected peers, based on TSA’s smaller indicative market capitalisation.

• Key risks include slower-than-expected demand for steel products.

Source: RHB Securities Research - 17 Jan 2024