As I have repeated a few times before, in order to beat the market, we have to think ahead and differently from everyone else.
At the beginning of the year, who would have thought that airline stocks like AirAsia, AAX or MAHB would be among the best performing in 2016? Most people wrote off these stocks which fell into a bottomless pit last year but how wrong were they now in hingsight?
I believe there are 2 main causes for poor investment judgement:
a) People follow a herd mentality: When something is out of fasion, people avoid it at all cost and when something is in fashion, they rush in usually at the end of the cycle.
b) People are either too lazy or unable to perform research or lack the foresight to determine positive changes in industries.
Today, I will be talking about Masteel. Yes, the steel industry has been one of the worst performing industries in 2014-2015 but could the industry be staging a massive rebound? I have high conviction that the answer is YES. Similar to aviation, this is one of the sectors that will perform well in 2016 and is just in the beginning stages.
Masteel is involved in the downstream segment of the steel industry producing steel bars for the construction sector. Steel bars are used in every facet of construction, from the reinforcement of concrete pillars, slabs, structures, tunnel lining to the foundation for buildings, roads and railroads. Masteel is vertically integrated, meaning it produces its own raw materials (steel billets) through the processing of scrap metal which is increasing in supply from countries like China, Japan and Korea making it cheaper to procure.
Now, let us have a look at the catalysts for this imminent rebound:
1) 4Q15 net loss narrowed to just RM2mil with management confident of turning a profit in 2016. For the past 5 years, revenue and net profit has been growing but dropped in 2014-2015 due to low steel bar prices due to concerns on China's growth. Removing foreign exchange gains/losses in 2015, the loss was only RM23.6m.
2) Steel bar prices are staging a very aggressive rebound after overblown fears of a China slowdown is abating now that China's policy makers have signalled stable, more sustainable growth. Moreover, demand for housing in China is on the rise indicated by increasing property prices in major cities which rose to a 2-year high. This higher demand which translates into higher consumption of steel bars is positive for steel prices to continue its upward trend. At its current levels, it is already 10% higher than 2015's full year average.
3) Capacity expansion of 150k MT of steel bars (increase of 33%) from 450k MT to 600k MT starting Oct 2016 is just in time for the RM28bn MRT2. At present, MRT projects already account to 20% of Masteel's sales. In addition, according to Public Investment, the cost of the new factory in Bukit Raja was RM120m, similar to Masteel's current market cap at only RM135m. This is absurd, it means that at Masteel's current price and market capitalisation, investors are only paying slightly more for the cost of its brand new factory leaving everything else for FOC.
4) Imposition of 5% import duty on cheaper available imported steel bars with potential for an additional 35% duty on imported steel bars. If implemented, it would be a game changer, making all imported steel bars uncompetitive and increasing demand for Masteel's steel bars. To help ensure the duties are effective, the government has a high level of surveillance and enforcement with raids conducted on steel importes to ensure the duty is paid.
An excerpt from their press release:
"Meanwhile, the Group is collaborating closely with the relevant regulatory bodies to ensure enforcement of the recently announced 5% import duty for steel bars (HS 7214), through swift identification and reporting of errant importers. This is expected to curb the rampant imports of substandard steel bars from China.
Additionally, the Construction Industry Development Board (CIDB) Act (Service of Notice) Regulations 2015, which was announced in June 2015, is anticipated to be enforced with effect from January 2016. The CIDB Act targets errant users of non-Malaysian Standard MS 146 steel bars, with each offence to be fined a minimum of RM50,000"
5) Masteel is currently trading at only 0.25x Price-to-book ratio. This is partly due to the delay in submission of audited accounts last year which led to a suspension. I believe this is a one-off event and not likely to be repeated thus creating an unfairly low and underinflated share price creating a buying opportunity. At minimum, Masteel should be priced at 0.4x price-to-book ratio, similar to its past 5-year average where MRT1 was rolled out. That would bring a fair valuation of RM0.88 (upside of 60%). This would also bring its share price back to level before the late submission of accounts in April 2015.
Excerpt from management from a newspaper article:
"On the accounting hiccup it experienced earlier this year, Tai said UHY FLVS Sdn Bhd had conducted an independent and comprehensive review of the issues raised by its previous auditor Nexia SSY and that the board of directors had agreed to the positive findings of the UHY report.
The Association of Chartered Certified Accountants (ACCA)- Associate membership (ACCA) obtained in July 1998- Fellow membership (FCCA) obtained in July 2003Malaysian Institute of Accountants (MIA)- Public Accountant membership (PA) obtained in July 1999- Chartered Accountant membership (CA) obtained in June 2001
Working experience and occupation
Mr Lau has more than 13 years of experience in various fields of accounting, audit, taxation and management matters as well as in-house training instructor on updating of accounting standards and audit software program, corporate restructuring, corporate exercise and due diligence assignments.
MALAYSIA STEEL WORKS (KL) BHD ("Masteel" or "the Company") - Update on the Joint-Venture Agreement entered between Masteel and KUB Malaysia Berhad
We refer to the announcement made on 19 January 2011, wherein Masteel announced that the Company had entered into a Head of Joint Venture Agreement ("MOU") with KUB Malaysia Berhad (Company No. 6022-D) ("KUB"), a company listed on the Main Market of Bursa Malaysia Securities Berhad whereby KUB and Masteel have agreed to combine their capabilities and resources to co-operate and collaborate with each other in the joint-venture company, Metropolitan Commuter Network Sdn Bhd to pursue the rail transit network project in the Iskandar Development Region ("Parties") and the Parties are desirous of submitting a joint proposal for the Project to the Government of Malaysia.
Pursuant to Bursa Malaysia Securities Berhad's letter dated 4 August 2006, we wish to announce the status of the MOU that the Company and KUB mutually agreed to terminate the MOU and the Company would allocate back the resources to focus on their existing core business.
BURSA MALAYSIA SECURITIES PUBLICLY REPRIMANDS MALAYSIA STEEL WORKS (KL) BERHAD AND FINES 3 EXECUTIVE DIRECTORS A TOTAL OF RM130,500
MALAYSIA STEEL WORKS (KL) BHD
Bursa Malaysia Securities Berhad (635998-W) (Bursa Malaysia Securities) publicly reprimands Malaysia Steel Works (KL) Berhad (MASTEEL) and 3 executive directors for breaches of the Main Market Listing Requirements of Bursa Malaysia Securities Berhad (Main LR). In addition, the 3 executive directors of MASTEEL are fined a total of RM130,500.
MASTEEL is publically reprimanded for committing the following breaches of the Main LR:-
paragraph 9.23(2) of the Main LR for failing to announce the Company’s annual audited accounts for the financial year ended (FYE) 31 December 2014 (AFS 2014) on or before 30 April 2015 and instead announced the AFS 2014 on 19 June 2015;
paragraph 9.23(1) of the Main LR for failing to issue the Company’s annual report for the FYE 31 December 2014 (AR 2014) on or before 31 May 2015 and instead issued the AR 2014 on 9 July 2015; and
paragraph 9.22(1) of the Main LR for failing to announce the Company’s quarterly report for the financial period ended 31 March 2015 (1st QR 2015) on or before 31 May 2015 and instead announced the 1st QR 2015 on 2 July 2015.
MASTEEL is also required to ensure all its directors and the relevant personnel of the company attend a training programme in relation to compliance with the Main LR particularly pertaining to financial reporting. In addition, MASTEEL is required to ensure its Board of Directors review and assess the adequacy and competency of its finance and accounting resources and adequacy, comprehensiveness and effectiveness of the company’s policies and procedures in respect of financial reporting and implementation of the same.
The 3 executive directors of MASTEEL are publically reprimanded for breaching paragraph 16.13(b) of the Main LR where they had permitted MASTEEL to commit the above breaches. In addition, fines are imposed on them as follows:-
No.
Directors
Penalty Imposed
1.
Dato’ Sri Tai Hean Leng @ Tek Hean Leng
Managing Director / Chief Executive Officer
Public Reprimand and total fines of RM43,500
2.
Lee Kean Binh
Executive Director
(Resigned on 30 September 2015)
Public Reprimand and total fines of RM43,500
3
Lau Yoke Leong
Executive Director
Public Reprimand and total fines of RM43,500
The finding of breach and imposition of the above penalties on MASTEEL and its directors are made pursuant to paragraph 16.19 of the Main LR upon completion of due process and after taking into consideration all facts and circumstances of the matter including the materiality / impact of the breach to MASTEEL and shareholders / investors and the role, responsibilities, knowledge and conduct of the directors.
Bursa Malaysia Securities views the contraventions seriously as the timely and accurate submission of financial statements is one of the fundamental obligations of listed companies and is of paramount importance in ensuring a fair and orderly market for securities traded on Bursa Securities and necessary to aid informed investment decisions.
Bursa Malaysia Securities also reminds MASTEEL and its Board of Directors of their responsibility to maintain the appropriate standards of corporate responsibility and accountability to its shareholders and the investing public.
BACKGROUND
The delay in the announcement / issuance of the AFS 2014, AR 2014 and 1st QR 2015 was essentially due to MASTEEL’s failure to resolve the following audit issues with the external auditors which led to the external auditors not being able to express an opinion on the AFS 2014:-
The veracity of sales transactions recorded by the company with certain customers whose total outstanding balances as at 31 December 2014 amounts to RM287,171,341 and consequently, the recoverability of these balances which represented 86% of the Company’s trade receivables of RM334,541,368; and
The nature and classification of a sale arrangement with a foreign trading house where the amount of advances outstanding to the foreign trading house amounts to RM101,075,929 as at 31 December 2014.
The unresolved audit issues resulted in the appointment of a special auditor and upon completion of the special audit, the financial statements were issued where the external auditors had expressed a qualified opinion in respect of the audit issues in the AFS 2014 announced on 19 June 2015.
MASTEEL and the executive directors had failed to discharge their duties to ensure the timely announcement / issuance of the AFS 2014, AR 2014 and 1st QR 2015 in accordance with the Main LR as:-
Reasonable notice and reminders (since 26 November 2014) were given to the company by the external auditors as to the audit issues towards addressing and resolving the same to ensure timely finalization of the audit and issuance of the financial statements; and
Notwithstanding the various reminders by the external auditors and the materiality of the audit issues including implication of the same to the AFS 2014, MASTEEL and the executive directors had failed to demonstrate expeditious and reasonable steps / actions taken to address, procure and/or provide the external auditors with the necessary appropriate documents / audit evidence (including reasonable explanation) as would sufficiently / reasonably explain / account for the transactions and address the concerns of the external auditors to facilitate the proper audit and finalisation of the financial statements.
The executive directors were involved in the day to day and/or financial management of the company including liaising with the external auditors to resolve the audit issues and they were or should be in a position to ascertain, address and resolve the audit issues particularly in the light of their involvement / knowledge of the transactions. They also had supervisory obligation over MASTEEL and hence, control over how the company should effectively address and resolve the audit issues towards ensuring compliance of the obligations under the Main LR. However, they had failed to demonstrate reasonable steps taken to monitor, expeditiously address and resolve the audit issues and ensure timely preparation and finalisation of the AFS 2014. It was only upon the audit committee’s recommendations to the board to appoint a special auditor to conduct an independent and comprehensive review of the audit issues on 27 April 2015 that the board proceeded to approve and appoint the special auditor towards resolving the audit issues.
MALAYSIA STEEL WORKS (KL) BHD ("Masteel" or "the Company")- ARTICLE ENTITLED 'EXPLAIN WHY RAIL DEAL ABORTED' PUBLISHED IN FOCUS MALAYSIA/10-16 DECEMBER 2016
We refer to our announcement dated 25 November 2016 and the above article.
Subsequent to the execution of the Heads of Joint Venture Agreement (‘the Agreement’) between KUB Malaysia Berhad (‘KUB’) and Malaysia Steel Works (KL) Bhd (‘Masteel’) (hereinafter referred to as ‘the Parties’), Masteel wishes to state that since the presentation of the Johor commuter train project (‘the Project’) to the Economic Council (‘EC’) on 8 August 2011 and pursuant to that meeting, the Parties had followed the direction of the EC to finalise certain issues with the Ministry of Transport and having coordinated with three (3) Ministers of Transport, the Parties had in early 2016 finalised its proposal for the re-tabling to the EC.
In a meeting with the Economic Planning Unit (‘EPU’) on 15 April 2016 to discuss the re-tabling of the Parties proposal to the EC, the Parties was informed to undertake the addition of ‘social’ routes for its Johor commuter train services.
After due consideration, the Parties had concluded that the additional routes will render the Project economically unviable.
In view of the long gestation time and the impasse with EPU, the Parties had decided to terminate the Agreement on the basis that all efforts made by the Parties to date with the Government of Malaysia have not yielded a definitive timeline for the satisfactory conclusion of the said Project.
MALAYSIA STEEL WORKS (KL) BHD ("MASTEEL" or "the Company")- Proposed Final Single Tier Dividend
The Board of Directors of MASTEEL is pleased to announce that a final single tier dividend of 0.85 sen per ordinary share ("Proposed Final Dividend") has been proposed in respect of the Company's financial year ended 31 December 2016. The Proposed Final Dividend will be subject to the shareholders' approval at the forthcoming Forty-Fifth Annual General Meeting of MASTEEL.
A further announcement on the dates of entitlement and payment of the Proposed Final Dividend will be made at a later date.
Malaysia Steel Works (KL) Bhd ("the Company" or "Masteel")- Incorporation of a new wholly-owned subsidiary, MS Express Sdn Bhd
Pursuant to Paragraph 9.19(23) of the Main Market Listing Requirements of Bursa Malaysia Securities Berhad, the Board of Directors of the Company wishes to announce that the Company had on 19 April 2017, incorporated a new wholly-owned subsidiary, MS Express Sdn Bhd.
Please refer to the attachment for further details of the annoucement.
NEW ISSUE OF SECURITIES (CHAPTER 6 OF LISTING REQUIREMENTS)
COMBINATION OF NEW ISSUE OF SECURITIES
Description
MALAYSIA STEEL WORKS (KL) BHD ("MASTEEL" OR THE "COMPANY")(I) PROPOSED PRIVATE PLACEMENT; AND(II) PROPOSED BONUS ISSUE(COLLECTIVELY REFERRED TO AS THE "PROPOSALS")
On behalf of the Board of Directors of Masteel, RHB Investment Bank Berhad wishes to announce that the Company proposes to undertake the following:-
Proposed private placement of up to 24,450,800 new ordinary shares in Masteel (“Masteel Share(s)”), representing up to 10% of the Company's total number of issued shares (“Proposed Private Placement”); and
Proposed bonus issue of up to 53,791,760 new Masteel Shares (“Bonus Shares”) on the basis of 1 Bonus Share for every 5 existing Masteel Shares held on an entitlement date to be determined and announced later (“Proposed Bonus Issue”).
Further details on the Proposals are set out in the attachment below.
Final single-tier dividend of 0.85 sen per ordinary share in respect of financial year ended 31 December 2016
Further to the entitlement announcement dated 27 April 2017 and announcement 15 June 2017 on the outcome of the Annual General Meeting wherein the Ordinary Resolution 1 on the payment of final single-tier dividend of 0.85 sen per ordinary share in respect of the financial year ended 31 December 2016 was not duly passed, the Board of Directors of Malaysia Steel Works (KL) Bhd ("MASTEEL") would like to announce that the dividend entitlement announcement made on 27 April 2017 would be cancelled.
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