Company No: 233327 -M y Results Note z Mala

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PP 7767/09/2012(030475) MARKET DATELINE

Malaysia

01 March 2013 RHB Research Institute Sdn Bhd A member of the RHB Banking Group

Corporate Highlights

Company No: 233327 -M

R e su lts N ot e

01 March 2013

Malaysian Steel Works

Share Price Fair Value Recom

FY12/12 Net Profit Eases 2%

: : :

RM0.82 RM0.91 Neutral (Maintained)

Table 1 : Investment Statistics (Masteel; Code: 7075 )

Bloomberg: MSW MK

Net

Net

FYE

Revenue

Profit

EPS

Growth

PER

C. EPS *

P/NTA

Gearing

ROE

NDY

Dec

(RMm)

(RMm)

(sen)

(%)

(x)

(sen)

(x)

(x)

(%)

(%)

2012a

1,312.2

23.9

11.3

-2.3

7.4

-

0.3

0.5

5.7

1.2

2013f

1,353.1

34.7

16.5

45.7

5.0

21.0

0.3

0.4

6.3

1.2

2014f

1,380.1

36.6

17.4

5.7

4.8

-

0.3

0.4

6.2

1.2

2015f

1,402.8

43.2

20.5

17.9

4.0

-

0.3

0.3

6.9

1.2

Main Market Listing / Trustee Stock / Syariah-Approved Stock By The SC







* Consensus Based On IBES Estimates

Missed expectations. FY12/12 net profit missed expectations by 1118%. We believe the key variances against our forecast came from lowerthan-expected selling prices achieved and higher-than-expected production cost. FY12/12 net profit eased 2% largely due to lower selling prices achieved as well as higher production cost. Expanding capacity. To capitalise on growing local demand for billets and steel bars, Masteel is planned to expand its capacity by 9% to 600k tonne per year (from 550k tonne per year) for its billet mill and 55% to 550k tonne per year (from 350k tonne per year) for its steel bar plant. The new capacity is expected to come onstream by end-2013. Risks. These include: (1) Stronger-than-expected recovery in global steel consumption and hence steel product prices; and (2) Lower-than-expected input costs.



Earnings forecasts. FY12/13-14 net profit forecasts are cut by 7-27%, having lowered our selling price assumption.



Maintain Neutral. The global outlook for the steel sector in 2013 is likely to remain challenging due to the excess capacity and weak recovery in demand but we believe the steel industry is near to the bottom of the cycle. Accelerating output cuts, massive destocking activities coupled with recently announced pro-growth policy in China will provide a strong support for international steel prices. However, the near-term outlook for Europe is gloomier with falling demand while production cuts are sticky to the downside due to intervention by governments. Locally, steel consumption will be sustained by large-scale infrastructure projects under ETP and stable growth for automotive and manufacturing (particularly electrical goods) sectors. Fair value is RM0.91 based on 0.35x tangible book value of RM2.70, in line with its historical average during downcycles.

RHBRI

Vs. Above

Consensus

In Line Below Issued Capital (m shares) Market Cap (RM m)

216.4 177.4

Daily Trading Vol (m shs)

0.1

52wk Price Range (RM)

0.79-1.14

Major Shareholders: TYY Resources

(%) 30.9

Lembaga Tabung Haji

5.1

FYE Dec EPS Revision (%)

FY13

FY14

-27

-7

FY15 n.a

Var to Cons (%)

-21

-

n.a

PE Band

PER = 9x PER = 8x PER = 7x

Relative Performance To FBM KLCI

M’sia Steel Works

FBM KLCI

Joshua CY Ng (603) 9280 2178 [email protected] Please read important disclosures at the end of this report.

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01 March 2013

Table 2: Earnings Review (YoY Cumulative) FYE Dec 2011 2012 (RMm) 12M 12M Turnover 1,253.4 1,312.2

% YoY Chg 4.7

Operating profit

39.2

36.1

-7.9

Other Income Net interest income Pretax profit Taxation Net profit

2.2 -16.5 24.9 -0.5 24.4

3.8 -15.5 24.4 -0.6 23.9

75.2 -5.9 -1.9 1.6 -2.0

EPS (sen)

11.6

11.3

-2.3

Operating margin (%)

3.1

2.8

-0.4pt

Pretax margin (%) Net profit margin (%) Effective tax rate (%) Sources: Company

2.0 1.9 2.2

1.9 1.8 2.3

-0.1pt -0.1pt 0.1pt

Table 3: Earnings Review (QoQ) FYE Dec 2012 2012 (RMm) 1Q 2Q Turnover 339.92 344.1 Operating profit -2.6 22.2 Other Income 1.30 0.9 Net interest income -3.5 -4.2 Pretax profit -4.9 18.9 Taxation 0 0.1 Net profit -4.9 19.0 EPS (sen) -2.32 9.0 Operating margin (%) Pretax margin (%) Net profit margin (%) Effective tax rate (%) Sources: Company

-0.8 -1.4 -1.4 0.0

Table 4: Earnings Forecasts FYE Dec (RMm) FY12A

6.5 5.5 5.5 0.6

Observations/ Comments Mainly driven by higher sales volumes but slightly offset by lower selling prices achieved. Dragged down by lower selling priced achieved and higher production cost.

Dragged down by lower selling prices achieved and higher production cost.

Mainly due to the lower selling prices achieved and higher production cost.

2012 3Q 312.9 10.8 0.6 -3.9 7.6 -0.5 7.0 3.3

2012 4Q 315.2 5.7 1.0 -3.9 2.9 -0.2 2.7 1.3

%QoQ Chg 0.7 -47.1

3.5 2.4 2.3 6.8

1.8 0.9 0.9 5.3

-1.6 -1.5 -1.4 -1.5

FY13F

FY14F

FY15F

1,312.2 4.7

1,353.1 3.1

1,380.1 2.0

1,402.8 1.6

EBITDA EBITDA margin (%)

61.9 4.7

72.8 5.4

74.3 5.4

80.9 5.8

Depreciation Net interest income Pretax profit

-21.8 -15.6 24.4

-21.1 -15.2 36.5

-21.7 -14.0 38.6

-22.7 -12.8 45.5

Taxation -0.6 -1.8 Net profit 23.9 34.7 Source: Company data, RHBRI estimates

-1.9 36.6

-2.3 43.2

Turnover Turnover growth (%)

77.5 0.2 -61.8 -70.3 -61.2 -61.4

Observations/ Comments Driven by higher sales volumes. Dragged down by lower selling prices.

Dragged down by lower selling prices achieved. Mitigated by lower tax expense.

Dragged down by lower selling prices achieved.

Table 5: Forecast Assumptions FYE Dec FY13F

FY14F

FY14F

600,000 500,000

650,000 600,000

650,000 600,000

100 97.0

100 82.5

100 83.3

Production Volume (tonnes p.a.) Billet Bars Utilisation Rate (%) Billet Bars Sources: RHBRI estimates

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01 March 2013

IMPORTANT DISCLOSURES This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank Berhad (previously known as RHB Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances as may be permitted by applicable law. The opinions and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may differ or be contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be construed as an offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein in any manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated persons may from time to time have an interest in the securities mentioned by this report. This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Neither RHBRI, RHB Group nor any of its affiliates, employees or agents accepts any liability for any loss or damage arising out of the use of all or any part of this report. RHBRI and the Connected Persons (the “RHB Group”) are engaged in securities trading, securities brokerage, banking and financing activities as well as providing investment banking and financial advisory services. In the ordinary course of its trading, brokerage, banking and financing activities, any member of the RHB Group may at any time hold positions, and may trade or otherwise effect transactions, for its own account or the accounts of customers, in debt or equity securities or loans of any company that may be involved in this transaction. “Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding company and the respective directors, officers, employees and agents of each of them. Investors should assume that the “Connected Persons” are seeking or will seek investment banking or other services from the companies in which the securities have been discussed/covered by RHBRI in this report or in RHBRI’s previous reports. This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflect information known to, professionals in other business areas of the “Connected Persons,” including investment banking personnel. The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues. The recommendation framework for stocks and sectors are as follows : Stock Ratings Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain Neutral: Share price may fall within the range of +/- 10% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels Sell: Share price may fall by more than 10% over the next 12 months Not Rated: Stock is not within regular research coverage Industry/Sector Ratings Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months. Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months. Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months. This report may not be reproduced or redistributed, in whole or in part, without the written permission of RHBRI and RHBRI accepts no liability whatsoever for the actions of third parties in this respect.

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