Period

1Q15

Actual vs. Expectations

3M15 core net loss (CNL) of RM7.9m came in way below our and consensus expectations. CNL was derived after excluding an one-off item, i.e. unrealised foreign exchange loss of RM2.8m.

The unexpected loss was due to lower-than-expected sales volume and selling prices.

Dividends

None as expected. Key Result

Highlights

For the first time since 1Q12, 1Q15 unexpectedly turned into the red, dragged down by: (i) poor sales volume, and (ii) persistent depressed average selling steel prices.

We believe the lower sales volume is due to the sharp spike in steel imports in Mar-15 (+141%) MoM, as compared to increase in steel exports (+59% MoM) in Mar-15.

Meanwhile average steel (rebar) prices declined by 9% QoQ and 19% YoY to c.USD500/MT (c. RM1,850/MT), which we believe was due to due to unresolved global steel oversupply issues in the world’s biggest steel producing countries namely China and South Korea.

Outlook

Remain challenging in the near-medium-term as we view that the local construction activities may not be sufficient to help the local steel industry fully recover given the persistent oversupply situation in major global producing countries (i.e. China and South Korea).

To recap, MASTEEL’s external auditor, Nexia SSY issued a qualified opinion on the group’s audited account on 19-Jun- 15. In short, the auditor raised concern on: (i) veracity of sales transaction recorded by the group’s customers amounted RM287.2m and (ii) the nature and classification of a sales arrangement with Foreign Trading House (FTH). The qualified opinion was issued despite the fact that the other independent auditor, UHY FVLS agreed to the positive findings of the group’s accounts. We were negatively surprised on this matter as we were previously expected Nexia SSY to agree with the positive findings of the independent auditor of UHY FVLS.

Change to Forecasts

N.A.

Rating

NOT RATED. (Our previous rating was MARKET PERFORM.)

Valuation

As part of our sector coverage restructuring, we decided to transfer MASTEEL to our non-core coverage, i.e. “On Our Radar”. Despite being a non-core coverage, we will continue to monitor MASTEEL and keep investors updated should there be any development and/or updates on the group.

Our FV is RM0.67, based on ascribed FY15E PBV of 0.25x. This is in line with MASTEEL’s -2.0SD valuation. Discounted valuation is justified after taking into account: (i) higher earnings risks no thanks to the unexpected 1Q15 net loss and persistent decline in steel prices, and (ii) concern on different view of both independent and external auditors.

Risks to Our Call

N.A.

Source: Kenanga Research - 3 Jul 2015