Masteel to pass cost of power rate hike to customers

PETALING JAYA (Feb 5, 2014): Malaysia Steel Work Bhd is planning to pass the additional cost incurred from the recent electricity tariff hike to its customers, a move, which if successful, could boost its earnings.
PublicInvest Research analyst Chong Hoe Leong said despite being hit by the electricity tariff hike, Masteel is trying its best to minimize the impact by passing on the additional cost to consumers.
The principal activities of Masteel is in the manufacturing and marketing of high tensile steel bars, mild steel bars and prime steel billets. Masteel has a wide network of customers domestically as well as internationally.
Chong cautioned that if Masteel earnings for financial years ended Dec 31, 2014 (FY14) and FY15 would take a dip if its plans to pass the additional cost do not go through.
"Our current earnings forecast for FY14-FY15 is based on the assumption that there is no cost pass through, which will see its earnings drop by 49%-51%," he said.
PublicInvest forecast Masteel's net profit for FY2014 and FY2015 at RM17.1 million and RM25.5 million respectively.
In report in August last year, before the electricity tariff hike was announced, Chong had expected Masteel net profit to accelerate at a strong double-digit growth in the next three years up to 2015.
He had predicted that Masteel's net profit was likely grow in the range of 22% to 30% for (FY13-FY15) as it ramps up its production capacity in the upstream and downstream segments.
Nevertheless, he said, any positive response from ongoing discussions with Masteel customers could spark some earnings surprise for the company, which should at the very least partly help offset some of these additional costs.
"Pending further clarification from the management, we are keeping our neutral recommendation on Masteel with an unchanged target price of RM1.08," he said.
Chong projected Masteel to post a net profit of RM8 million to RM9 million for the final quarter of FY2013, and a 30% growth for the 12 months of FY13 net profits.
"We also expect a final dividend per share 9 sen to be announced, making up a full-year dividend payout of 15% for FY13," he said.
Masteel factories are located strategically at Petaling Jaya and Bukit Raja, Klang in the state of Selangor.
The Bukit Raja factory produces steel bars, steel billets which are the feed stock for the rolling mill in Petaling Jaya.
Chong noted that Masteel is looking to expand its Bukit Raja meltshop to 700,000 tonnes from 650,000 tonnes last year.
"Meanwhile, it is also increasing its rolling mill from 400,000 tonnes to 450,000 tonnes, which will bump up its sales by about 14% this year assuming steel bar prices remain steady at current levels ~RM2,000 per tonne," he said.
"Total allocated capital expenditure for this year is around RM50 million to RM60 million, which will see its net gearing increase to 0.6 times from 0.5 times by end-2014," he added.