Poised for steel-y growth - MASTEEL

by **Cals** Thu 15 Aug 2013, 09:21

Poised for steel-y growth
Business & Markets 2013
Written by Public IB Research
Thursday, 15 August 2013 08:49

Malaysia Steel Works (KL) Bhd
(Aug 14, RM1.10)
Initiate coverage at RM1.10 with outperform rating and target price of RM1.36: We recommend a target price of RM1.36 for Malaysia Steel Works (Masteel) based on a conservative 10 times 2014 financial year (FY14) diluted earnings per share, which implies a potential upside of 23.6%.

Though the company has the smallest market share amongst its peers, we think it deserves better valuations given: (i) its strong double-digit earnings growth; (ii) stronger-than-average balance sheet; and (iii) successful bidding for the Iskandar rail project in Johor, which would be the key catalyst for the company in the next couple of years.

Established in 1971, Masteel is among the top five integrated steel manufacturers in Malaysia. The group operates a meltshop in Bukit Raja, Klang with an annual production capacity of 600,000 tonnes of steel billets and a rolling mill in Petaling Jaya that manufactures 350,000 tonnes of steel bars per annum.

Its range of steel bar products, which include high tensile deformed bars and mild steel round bars, mostly cater to the CONSTRUCTION [] sector. Steel bars are the main revenue contributor to the group, making up 61% of total revenue in FY12.

As the steel industry is highly tied to the performance of the construction sector and is cyclical in nature, management has cautiously expanded its capacity to improve its operating margins through better economies of scale. The company has earmarked RM180 million to increase its billet plant capacity with an additional 50,000 tonnes by 2014, while also increasing its rolling mill capacity by 50,000 tonnes per annum by 2015.

Its key risks are: (i) foreign currency exposure — if the US dollar weakens by 5%, it could affect Masteel's earnings by nearly 2%; (ii) commodity risks — soft steel product prices and rising raw material costs could drastically affect the company's earnings; (iii) high dependency on local construction projects — any slowdown or delay in their execution could affect the demand for steel products; and (iv) dumping activities by regional counterparts. — Public IB Research, Aug 14

[You must be registered and logged in to see this image.]

This article first appeared in The Edge Financial Daily, on August 15, 2013.