This article first appeared in The Edge Financial Daily, on November 3, 2015.

Malaysia Steel Works (KL) Bhd
(Nov 2, no shares transacted)
Maintain neutral with an unchanged target price of 40 sen: We recently visited Malaysia Steel Works’ new rolling mill in Bukit Raja, Klang, and came away with some positive updates.

The rolling plant started operating last month and is expected to generate better contribution to the group in the last quarter of this year. Also, the Malaysian steel industry has been pushing for tighter measures on steel product imports in efforts to curb stiff competition, particularly from China.

Nevertheless, we think the outlook remains challenging in the short term, and it will take a while for the industry to flush out cheaper-priced steel imports.

We expect the third quarter ended Sept 30, 2015 (3QFY15) to be another loss-making quarter mainly due to stiff competition from steel bar imports.

The average steel bar price in 3QFY15 was around US$353 (RM1,518) per tonne, falling 7.8% quarter-on-quarter and 28% year-on-year. We understand that the spread between China’s imports and local prices is around RM100 per tonne (based on the current exchange rate).

Currently, about 50% of the group’s revenue is derived from dealers, while 20% comes from mass rapid transit-related projects. The company also exports about 10% of its production overseas, which will likely benefit the company through foreign-exchange gains.

Besides pushing for a 5% import duty on steel bars and stricter enforcement on illegal use of non-Malaysian standard compliance steel products, the local steel industry is also looking towards the implementation of a 35% safeguard duty to protect local interests. It will be tabled this month, and will be on a retrospective basis once it is successfully imposed.

The new rolling mill has started operating after two-and-a-half years of construction.

The new 150,000-tonne rolling mill, which cost about RM120 million, will increase the total rolling capacity to 600,000 tonnes and which can be expanded by another 100,000 tonnes in the future.

The new rolling mill will produce Y10, Y12 and Y16 (small diameter) premium steel bars, which will fetch higher margins (an additional RM100 in the selling price).

We expect to see additional sales contributions from the new rolling mill in 4QFY15.

Meanwhile, based on current steel bar prices, we expect the additional capacity to help improve the group’s sales by between 10% and 17% in FY16 and FY17. — PublicInvest Research, Nov 2