MASteel ... Safer Bet For Steel Exposure !

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

Year on year, its 1QFY2014 earnings improved 84% to rm3.1 million on higher operating margins due to slightly better scrap prices and helped by improvements in production methods.

Quarter on quarter its core net profit rose 18% to rm5.7 million despite a mile decline in revenues due to margin expansion and lower net interest expense.

From a valuation standpoint, it appears that the negatives have been priced into the share price (29 May 2014), as MASTEEL is currently (May 2014) trading at 0.38 times forward price to book value.

The stellar 1QFY2014 core net profit growth of 84% year on year should serve as a near term catalyst.

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 (June 2014) 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.

The rm1.23 billion intercity rail transit system project in Iskandar Malaysia, Johor which was jointly developed by Masteel/KUB is back on the government’s radar, following the appointment of a permanent transport minister.

The rail project was to be linked to Singapore’s MRT system, and would have up to 25 commuter stations in major towns along the Iskandar economic corridor in the initial stage.

Obtaining the rest of the approval to carry out the project would also give a boost to Masteel’s earnings as this would be the group’s first diversification into infra development.