Future income expected from rail operations, property development and infrastructure construction.
Malaysia Steel Works (KL) Bhd (Masteel) expects an additional RM400mil in sales per annum from its new rolling mill plant, which is built next to its meltshop in Klang, Selangor.
The expansion represents a 300,000-tonne increase in its downstream segment, which provides better margins for the company.
Currently, its downstream segment is served by its rolling mill plant in Petaling Jaya, which has a capacity of 450,000 tonnes.
By increasing its downstream production, Masteel’s profit margin is expected to improve. Prior to the expansion, all the company’s downstream production was handled by its plant in Petaling Jaya.
It was able to produce about 700,000 tonnes upstream, but if its downstream segment was to add value, then Masteel will see not only margin enhancement but also economies of scale.
“Previously, half of the steel billets we produced were sent to the Petaling Jaya rolling mill for enhancement, but once the expansion is completed, we will be able to reap better synergies between upstream and downstream production,” managing director Datuk Seri Tai Hean Leng tells StarBizWeek.
The expansion of the downstream segment was planned about two years ago.
The company has allocated RM100mil for the growth in its downstream activities, which will see its steel bar production increase by 67% to 750,000 tonnes.
“The expansion is to serve the demand. We realise that our supply is below demand and it will also provide economies of scale once the plant expansion is completed,” Tai says.
The downstream production is able to provide substantially better margins compared with the upstream segment.
An analyst who tracks the company estimates that the downstream segment is able to provide margins that could double those of the upstream.
However, the industry faces the biggest challenge from dumping activities by China companies.
Without an efficient policy, steel players will suffer even though there is a quality disparity.
The analyst says steel prices will continue to impact steel players in the country.
In regards to that, Tai says, “We are confident the Government will decide on the appropriate policies to help our industry.”
He adds that its products have a differentiation in terms of quality.
Masteel’s products go through stringent processes so that they meet the construction industry’s requirements, while it also has an advantage due to the strategic location of its Petaling Jaya plant.
“It is all about the utilisation rate of plants, proximity to the market and the technology employed. Through 40 years of honing our skills, we have become highly specialised in the manufacturing of high tensile steel bars,” Tai says.
PublicInvest Research analyst Chong Hoe Leong says the company’s earnings surprise may come from lower power rates, going forward.
The Government has announced a reduction in the electricity tariff rate for residential usage, but there was no mention of the industrial rates. Any downward revision will augur well for Masteel, which incurs 15% of its cost from energy.
Scrap steel accounts for some 70% of total costs.
“Masteel has seen steady income because about 33% of its steel sales is for the development of the mass rapid transit (MRT) project.”
Chong notes that Masteel’s plant in Petaling Jaya gives it a cost advantage for the MRT works that are carried out within the area.
He estimates that Masteel’s rolling mill expansion will contribute a 10% to 15% growth to its bottomline in 2015 and 2016.
For its first nine months ended Sept 30, 2014, revenue registered RM1.06bil while profit came in at RM11.28mil.
Its bottomline for the period was partly dragged down by a one-off deferred tax adjustment of RM9mil in its third quarter, as well as the electricity tariff hike last June.
Analysts forecast its revenue for the financial year ended Dec 31, 2014 to range from RM1.4bil to RM1.47bil, while full-year profit is estimated at between RM19.7mil and RM21.2mil.
Masteel has been actively pursuing its proposed RM1.23bil intercity rail transit system in Iskandar Malaysia, Johor, and is waiting for the final nod from the Government before proceeding.
In fact, the company has not slowed down in its pursuit of the project and has even identified the train to be used for the rail project.
“Once the economic council approves the project, we are well on our way to roll it out,” Tai enthuses.
According to him, the company and its partner, KUB Malaysia Bhd, are discussing a 37-year concession from the Government.
The project will be taken under a 60:40 partnership known as Metropolitan Commuter Network Sdn Bhd (MCN) between Masteel and KUB.
The business model will be sound with the income streaming in from three areas: rail passengers from the train operation, property development based on the 21 stations, and construction of the track, he explains.
MCN has received a support letter from the Iskandar Regional Development Authority and a review by the Unit Perancang Ekonomi Negeri Johor, as well as the presentation to the Transport Ministry and a meeting held by the Unit Kerjasama Awam Swasta.
The project is also expected to provide recurring income to Masteel.
“We have missed our original time line of seeing the project take off in 2013, as there have been four Transport Ministers within the last five years and this has understandably affected our efforts in getting all necessary approvals within our anticipated time line,” Tai says, adding that it has continually refined its business proposition to the Government through the period.
An analyst says the Iskandar rail project will be a positive catalyst for the company, but even if it is not immediate, Masteel’s fundamentals are still intact because its core business is still profitable compared with some other steel players who are making losses.
On top of that, demand will stem from the RM48.5bil worth of infrastructure projects announced by the Government.
However, the Iskandar rail project is expected to increase Masteel’s gearing level due to the scale compared with Masteel’s size, one analyst points out.
Bloomberg shows that analysts are still positive on Masteel’s prospects, giving a consensus target price of RM1.19 compared with its share price of 86 sen.