MASTEEL, the Southern Bank of Steel Stocks

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Oct 08 2007
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There’re reasons why certain stocks within a certain sector are trading at a lower P/E (price earning ratio) than other sectors. The steel is a tough industry and it doesn’t help to know the fact that the steel industry has gotten a bad reputation from many stocks investors who often associate it with huge capital outlay, long payback period, giant pension costs, competition, crushing debt loads, bankrupt firms and industry overcapacity.

You need to have great global economy with great demand for the metal in order for the sector to sustain. Fortunately you have China or else you can bet your last penny that the recent U.S. subprime crisis will bring the steel industry to its knee. As comparison, steel companies in U.S.are not trading at a very low P/E as compare to other sectors such as technology whereby Apple Inc., for example, is trading at P/E 45 times. Let’s take a look at some of steel stocks’ P/E:

  • United States Steel Corp – P/E: 9.80
  • Nucor Corp – P/E: 10.70
  • Reliance Steel & Aluminium Co – P/E: 10.60
  • Allegheny Technologies Inc. – P/E: 15.50
  • AK Steel Holding Corp – P/E: 32.30

Picking Steel Stock amongst the crowd

In Malaysia if you happen to be one of the veteran stocks investors, chances are the past scandal of Perwaja Steel might flashes in between your mind when you’re thinking of such metal Steel Industrystocks. Anyway, to fulfill the rule and best practice in stocks investing, you need to diversify. Amongst the steel stocks you’re pampered with choices such as Southern Steel Berhad, Kinsteel Berhad, Leader Steel Holdings Berhad, Amsteel Corporation Berhad, Ann Joo Resources Berhad, Malaysia Steel Works Berhad and others.

And if you talk about low P/E stocks, Malaysia Steel Works (KL) Berhad (KLSE: MASTEEL, stock-code 5098) is perhaps the stock that you should pay some attentions. The principal activities of Masteel are in the manufacturing and marketing of high tensile steel bars, mild steel bars and prime steel billets. Besides domestic market (about two-third), MASTEEL has a wide network of customers internationally as well.

MASTEEL’s Fundamental attracted LTH

Recently, Masteel posted a 73% growth in revenue in the second quarter ended June 30 to RM148.4mil. Net profit more than doubled to RM21.7 million from just RM10 million in the previous corresponding period. EPS expanded to 10.79 sen from 4.86 sen a year ago. In a filing with Bursa Malaysia, the company said it was on track to achieving RM500mil worth of revenue, adding its earnings were likely to grow 10% to 15% by the end of FY07.

MASTEEL financial statementSince 2002, MASTEEL has been consistently registered revenue growth. Net profits are at admirable level, not to mention the good EPS (earnings per share) and the dividends declared since 2005. But what made this stock mouth-watering is the fact that it’s trading at the low P/E of only 6.65 based on today’s (8th Oct 2007) closing price of RM1.50 per share and 2006 EPS of 22.56 cents per share. If 2007’s estimated EPS of 25.8 cents is taken into calculation, the stock is actually trading at mind-boggling 5.81.

Even if you do not wish to compare this P/E against U.S. same stocks category (which you shouldn’t in the first place), MASTEEL is still cheap compare to local steel stocks such as Kinsteel Berhad, Southern Steel and Ann Joo Resources Berhad which are trading at the range P/E of 8 to 9 times.

Based on the latest filing dated 5th Oct 2007, it appears MASTEEL has attracted the attention of Lembaga Tabung Haji (LTH) which emerged as a substantial shareholder with a 5.22% interest. The pilgrim management fund had acquired 407,000 shares in the company on 3rd Oct 2007, increasing its shareholding to 7.62 million shares. The argument that LTH was interested in Silver Bird Berhad might make sense that LTH could leverage on the food (bread) for its thousands of pilgrims but for LTH to buy into steel company could only signal that MASTEEL’s stock price is too cheap to ignore.

Technical Analysis says Resistance is very strong

Based on the latest 3-years stock chart, the RM1.50 level seems to be a very strong resistance to any stock investors, punters or traders looking for some fast bucks. This guy is not an ordinary fellow to beat. It’s really stubborn and you need some time for more accumulation and huge-size wrestler to move it.
MASTEEL stock chartIf you’re a bit greedy and would really like to maximize your profit, you might want to wait till the stock price to drop to below RM1.35 to accumulate it. At RM1.35 you’re paying 5.98 times (2006 EPS) and 5.23 times (2007 estimated EPS) P/E and unless China and Malaysia’s infrastructure comes to a sudden halt, your investment’s risk should be at its minimal.


The company’s risk is mostly on the fact that two-third of the revenue derived from domestic market. Hence most analysts who are upbeat on the stock is due to the outlook that more projects under the ninth Malaysia Plan (9MP) will materialize especially on the ambitious plan for the IDR (Iskandar Development Region). Another news that was expected to have impact on steel companies was from the China’s recent measures to not only remove export rebates but also raise export taxes on steel products which could reduce the profit of MASTEEL.

Nevertheless MASTEEL, the smallest steel makers in the country is a very well managed listed company and has stayed profitable even through the most difficult periods. Together with the stable steel price and the long-term contract price for iron ore that has doubled in the past three years, this stock might just be the Southern Bank (which was acquired by Bumiputra-Commerce Holdings) in the banking sector.

Already there’re rumors that there might be increase in steel price locally due t
o global demand and price escalation.

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