Malaysia Steel Works (KL) Bhd’s (Masteel) fate in the Iskandar intercity commuter rail project may not be sealed yet and the company is not leaving any stone unturned in its effort to secure the project from the Federal Government.
Despite receiving the Johor state government’s support to carry out the RM1.23bil project, managing director and chief executive officer Datuk Seri Tai Hean Leng remains grounded on the company’s approach towards getting the nod from the other relevant authorities.
“I will not want to mislead the public (on whether the company is confident about getting the job) until everything is signed on the dotted line,” he tells StarBizWeek.
Tai is reluctant to expound on the process, adding that the company is employing whatever resources it has to bring the discussions to completion.
The Iskandar commuter rail project is a 60:40 joint venture between Masteel and KUB Malaysia Bhd undertaken through Metropolitan Commuter Network Sdn Bhd. The rail transit network project is planned to interlink the Iskandar Development Region and Woodlands, Singapore.
KUB Malaysia is a finance ministry-linked company.
On Wednesday, the steel producer announced on Bursa Malaysia that it has obtained support from the current Johor state government to proceed with the project. What this means is, Tai says, that Masteel has received a letter of endorsement from the state.
The announcement follows a news report early this week claiming that the project had hit a snag and was possibly derailed.
Masteel had vehemently clarified that it was not true and that it already received a support letter in 2011 from former Menteri Besar of Johor Datuk Haji Abdul Ghani Othman, who was also the chairman of Iskandar Regional Development Authority.
It had also received a clearance letter from the then transport minister Datuk Seri Kong Cho Ha in the same year.
The next step for the company now, Tai says, is going back to the Economic Council to report on its latest progress with the Johor state government. Masteel had met the Economic Council chaired by the Prime Minister once in August 2011 which had directed the company to further discussions with the transport ministry.
While he is cautious not to reveal his cards, Tai acknowledges that if everything falls into plan, the intercity railway project would widen the revenue stream for the already successful steel company.
“The returns are worked out, it is an attractive proposition.
“It will not usurp the earnings from our core business but will create a new pillar of revenue so we have two pillars to stand on,” he says.
In an earlier news reports, the project was estimated to be cash flow positive in the sixth year of operations, with revenue sourced mainly from ridership and cost stemming mainly from the lease payable to the government.
The intercity rail project is planned for on land belonging to the Federal Government but it being within the Johor state, Tai says it was crucial for the project to complement the transport masterplan the state government has in mind. One of the stations earmarked is said to be in Kempas, where the Johor government had indicated would be the southern transport hub.
While the railway concession will ultimately come from the federal government, Tai says this was about private sector proposing to fulfill an infrastructure need that has been identified by the state according to its own transport masterplan.
“We need to coordinate closely with (the state) because they are the major stakeholder and that our plan must be in line with the state’s socio-economic agenda,” he says.
There is no competition for the rail project as yet and there was no call for tender.
Masteel is currently a pure steel player - producing, selling and trading steel bars and billets. The intercity rail project, if it comes to fruition, will be its maiden voyage into a new but relatable sector - infrastructure construction.
Even without factoring in the rail project, Masteel is already a steal for investors.
At a closing price of RM1.04 yesterday, Masteel is trading at a 60% discount to its book value of RM2.57.
The company with a market capitalisation of RM243.27mil is trading at a price-to-earnings (PE) ratio of 7.21 times. The industry PE average hovers around 11 times.
Its low net gearing of 0.39 times was achieved through an efficiently managed inventory, leading to steady profits.
“When we don’t hold a lot of stock, we don’t hold a lot of payables that will use up a lot of the working capital, resulting in higher gearing,” he says.
Masteel’s strategy is to keep its stock and receivables fairly low, for cash flow efficiency.
Another of its advantage is in the location of the company’s plants - Petaling Jaya and Klang - which allows the company to incur minimum logistics costs given that most infrastructure projects are within the Klang Valley.
Masteel is one of the few steel players in Malaysia which are still profitable despite the many issues the sector faces.
In the past few years, revenue has been climbing alongside the demand for steel in the local construction industry. Its three-year compounded annual growth rate for the financial years 2010 to 2013 is 11%.
Masteel has already begun its organic expansion, channeling some RM80mil into building a new steel rolling mill beside its existing Bukit Rajah meltshop in Klang.
Whether there is enough demand to support the increased production, Tai says the new mill will take up the demand that Masteel currently fulfills through trading.
“We have maxed out our current capacity and are trading with distributors to provide more steel bars to the market. By this, we are sharing the margins with the distributors. When the new plant is ready, we would be able to supply all on our own and pick up the entire margin,” he says.
Its new rolling plant, when fully operational in 2016, will bump up the company’s steel bar production by 45% from the current 450,000 MT to 650,000 MT.
For every tonne of billet converted to bar, there is a projected profit margin of RM180. This means that Masteel stands to see a boost of RM36mil in profit by 2016.
Its other plant, the billet plant or meltshop, has a capacity of 700,000 MT. Both plants have a healthy 75% utilisation rate.
Tai holds a rather steely outlook for the sector, when asked if he thinks there would be any consolidation among the struggling players.
“I think it will be more of a liquidation scenario than a consolidation one. There is little motivation for the players who remain in the black to take on the costs and balance sheets of those who are not faring as well,” he says.
Tai explains that the issues afflicting the sector, such as weak steel prices, high raw material costs, hikes in electricity and gas tariffs and cheaper imports from China, will continue to exist hence it would be prudent to not burden the balance sheet with these factors.
Masteel is somewhat cushioned from the steel dumping from China as it is able to price its steel products competitively because it has the volume.
Even though it has to price its bars lower to compete with the imports from China, Masteel’s products has better quality control which customers would go for in the end.
To its advantage, lowering the price of its products has not impacted its margins as the price of scrap metal has also tracked downwards.
As for its own growth outlook, Tai foresees Masteel to continue to ride on the robust construction industry.
Demand from 2013 to 2015, he says, would be strong.