Malaysia Steel Works (KL) - 8th Nov 2010

The Beauty of Being Small
We visited Malaysia Steel Works (KL) (Masteel) last week and gather thatManagement is hopeful of riding on a long list of projects announced by theGovernment, especially with its expansion plans well under progress. We suspect Masteel may report a surprise surge in 2H, in tandem with its efforts to import cheaper scrap metal by containers and its smallish size enabling easiermaneuvering of sales during a weak market. Therefore, we are upgrading our call toTrading BUY resulting from the higher earnings, with our new fair value tagged atRM1.22.

Dropping in on Masteel. We brought a small group of Institutional Investors to visitMasteel’s office and rolling mill in Petaling Jaya last Friday. The company’s MD cum CEO,Dato’ Sri Tai Hean Leng, took opportunity to give an overview of Masteel’s operation, andthe company’s and steel industry outlook.

Plant expansion well in progress. After spending some RM60m to RM70m over the pasttwo years to modify its furnace and billet caster, management expect billet capacity toprogressively increase from 450,000 tonne per year (tpy) to 650,000 tpy in FY12 by deployin stages 130mm billets instead of the originally 120mm. The company has also identified a plant near its existing rolling mill to embark on its downstream expansion plan. As the said plant only requires minimum modification conversion to install a new rolling facility, thecompany has identified three machine suppliers from China to expedite the delivery of therequired machines. Management is targeting to increase its rolling capacity to 500,000 tpy upon full commissioning in FY12m, hoping that this would be on time to ride on the stringof public infrastructure and building projects announced by the Government recently.

Time to show that “small is beautiful”. While we expect weak financial performance from steel mills in 2HFY10, Masteel’s management suggests that the company’s salestonnage is encouraging. Dato’ Sri Tai also said the company has been endeavoring toimport containerized scrap metal after the liberalization of the scrap market since end-2008. Although we are surprised at the possible increase in sales volume, we think Masteel may have benefited from being centrally located in the catchment areas of steeldemand. Also being a smaller mill, the volume it produces is way easier for the market toabsorb. We also suspect that management may have accumulated enough experience in dealing with cheaper scrap imports by container, which are normally priced at aboutUSD20 discount compared to bulk imports. Therefore, we are revising upwards our FY10estimates by 62.7% to RM42.4m and FY11 numbers by 7% to RM47.5m. As its earningsmay exceed market expectation, we upgrade our call to Trading BUY, with a new targetprice of RM1.22, derived from 5x PER and 0.59x P/NTA on rolling over to FY11 figures. (Source: OSK Research)