KUCHING: Malaysia Steel Works Bhd (Masteel) returned to profit with RM13.4 million in the third quarter from a loss of RM2 million in the first half of financial year 2009.

The turnaround was mainly attributed to the escalating average selling prices (ASP) of long steel products between May and July, 2009 resulting from a mismatch with cheaper steel scrap costing.

According to OSK Research Sdn Bhd (OSK) in its recent research report, the regular two-month lag also translated into good margin shipments being mostly recorded in third quarter. The settlement of new iron ore benchmark prices for 2009 and 2010 have given steel prices a clearer direction in the year ahead, thus providing some degree of comfort to industry players in committing orders in the third quarter.

Masteel’s revenue grew 15.3 per cent quarter-on-quarter and earnings before interest, tax depreciation and amortisation margin also surged to 10.5 per cent.

The research firm explained that while the company’s third quarter numbers came in well within its and street expectation, the sharp pullback in China’s local steel prices since August 2009 had shaken market sentiment; thus the financial year 2009 projection. Since local prices have remained flattish in the past few months, it was predicted that suppliers, taking the cue from the China market, would offer larger discounts.

A quarter-on-quarter profit contraction was predicted entering into the fourth quarter of the calendar year 2009, which caused the financial year 2009 estimates to be downgraded to a marginal loss of RM10.3 million from a small profit.

OSK pointed that the financial year 2010 numbers were kept on high, with expectation that the effects of the stimulus packages being rolled out by various governments within the region and the steel bar supply contract worth RM120 million over three years to Stemcor Australia Pty Ltd to help boost shipments.

While Masteel’s immediate share price performance may still hinge on a recovery in China’s steel demand and prices, the market’s ongoing search for “recovery plays” may put steel counters back in the limelight, especially with the company still trading at undemanding valuations
and it being less appealing owing to its relatively small size.

The research firm maintained its recommendation on Masteel and viewed the company as the best exposure to the smaller capital steel stocks. Masteel’s fair value was tagged at RM1.20, derived from 6 times the financial year 2010 earnings per share and 0.47 times the financial year 2010 net tangible asset per share.