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Friday, April 11, 2014

Masteel : Safer bet for Steel Exposure

For your weekend reading:


Its earnings results for the fourth quarter ended Dec 31 of financial year 2013 and full FY2013 were in line with market expectations.

 

Turnover in the last quarter of the year was 11.7% higher year on year on the back of increased volume demand but was relatively flat compared with the immediate preceding quarter.

 

Net profit doubled in 4QFY2013 to rm5.4 million from rm2.7 million in the previous corresponding quarter. This is attributable to better economies of scale, which led to improved margins.

 

For the full year turnover was some 4.8% higher at rm1.38 billion. Operating margins in 2013 improved due to lower cost for scrap steel and better plant utilization on higher volume sales.

 

Consequently net profit rose to rm28.8 million from rm23.9 million in 2012 – up by 20.6%.

 

The company’s balance sheet remains in good shape and gearing is among the lowest in the stel sector. Gearing stood at 41% as at end 2013.


Domestic steelmakers have been going through a tough patch in recent years amid the global economic slowdown, resulting in excess capacity and weak selling prices. Moreover persistent overproduction in China continues to dampen selling prices.

 

Indeed, dumping by Chinese manufactures has pressured margins in select segments of the domestic market. There is also anecdotal evidence of cheap imports of steel bars although to a far lesser degree.

 

Against this backdrop, Masteel has fared comparatively well. The company stayed profitable in the past four years prior to 2014 though earnings were somewhat range bound.

 

Positively volume demand has been trending higher on the back of increased activities in the domestic construction and property sectors.

 

Many of the projects are centered within the greater Klang Valley, which benefits Masteel given the proximity to its plants and therefore lower transport costs.

 

To meet demand increases, the company has been inching production capacity higher through process improvements, helping to boost economies of scale and overall margins.

 

The company’s sales are mostly domestic centric where selling prices have been comparatively resilient. The cost for scrap steel has trended lower through 2013 helping boost margins slightly.

 

By comparison, China uses iron ore and coking coal as feedstock for some 90% of its mills.

 

On the other hand, the weaker ringgit will raise the cost of the raw material, the portion that is imported. Any savings from cheaper scrap steel will also likely be offset by increases in other expenses driven by higher electricity and fuel prices.

 

Expecting higher turnover for MaSteel in 2014 but flattish margins.

 

Masteel is pushing ahead with its capacity expansion plans.

 

Going forward, due to weak prevailing sentiment for steel stocks, upside gains for Masteel will be limited in the near to medium term.

 

Masteel is a comparatively safer bet for those looking for steel exposure.

 

Its current PER stood at about 8.2 times and 7.3 times estimated earnings for 2014 and 2015 respectively.

 

It is also trading at only 0.4 times book value of rm2.51.

 

In other developments, discussions for an intracity commuter train project in Johor – under a 60:40 JV with KUB Malaysia are still ongoing with the various government departments.


Source : Kenanga remiser 

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