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Tuesday, September 3, 2013

Malaysia Steel Works - Signs Of Improvement


MSW’s 2Q13 earnings surged to MYR10.1m but annualized 1H earnings fell short of our and street estimates. We see the implementation of mega-projects gathering steam, lifting local steel demand, while a weak MYR presents export opportunities. There is speculation that MSW’s proposed rail project may be shelved, which would relief concerns of potential hikes to its gearing. Upgrade to Trading BUY with MYR1.08 FV.

- 2Q earnings jump. Malaysia Steel Works (MSW)’ 2QFY13 net profit of MYR10.1m was 185.3% higher q-o-q although annualized 1H numbers still fell short of our/street estimates. The sharp improvement can be attributed to lower scrap metal prices post the Chinese New Year celebration compared to the relatively stable steel bar prices in the domestic market.

- Growing local and export sales. With the polls over and Barisan Nasional retaining control of the Federal Government, implementation of mega projects will regain momentum and steel demand is expected to improve anytime now. The weak MYR also suggests that there is room for MSW to raise exports, which have turned profitable, benefitting from its inventory piled up prior to the recent major weakening of the MYR.

- All eyes on rail project. Business Times reported early last week that MSW’s proposed Iskandar rail project via a 60:40 joint venture with KUB Malaysia (KUB MK, NR) may be scrapped. However, MSW said it has not received any notification from any Ministries and has been in primary discussions with banks on funding arrangements for the project.

- Upgrade to Trading BUY. MSW’s share price had plunged in the past two weeks. We believe this is due to a combination of reaction to the broad market correction, speculation that its rail project may be scrapped and our recent downgrade. Rather than being concerned over the possible scrapping of its rail project, we would be relieved if it happened, as this project may escalate the company gearing if it was to proceed. Therefore, we upgrade MSW back to Trading BUY (from Neutral) with an unchanged FV of MYR1.08, based on 0.4x FY14 P/BV, or the mean of the stock’s historical trading range. Also, we make no changes to our forecasts.

Source: RHB

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