Melewar Industrial Group Berhad

Transcription

1 A Member of the TA Group MENARA TA ONE, 22 JALAN P. RAMLEE, KUALA LUMPUR, MALAYSIA TEL: / FAX: INITIATING COVERAGE FBM KLCI: 1, Melewar Industrial Group Berhad Tuesday, July 19, 2011 Hold in Anticipation of Earnings Booster TP: RM0.83 (+13.7%) Business Summary : The group manufactures and trades steel pipes and tubes. Through its subsidiary, Mycron Steel Berhad, the group manufactures and trades cold rolled steel sheet in coil. In addition, the group has a power generation business in Thailand. Major Shareholder (%) : Khyra Legacy Berhad (36.33) Recommendation: Hold Company Website : Market Capitalisation (RMmn): IR Contact : Ms. Zainab Abdul Aziz ( ) Current Price (RM): 0.73 Market/ Sector: Building Material Stock Code: 3778 TA Research Team Coverage aarontan@ta.com.my ext:1616 Key Stock Statistics FYE June 2011E 2012F EPS (sen) PER (x) Gross div/ share (sen) NTA/share (RM) Book value/ share (RM) Issued capital (mn shares) weeks price range (RM) Per Share Data FYE June E 2012F Book Value (RM) Cash Flow (sen) 0.0 (2.0) 0.3 (0.5) Earnings (sen) (68.8) Dividend (sen) Payout Ratio (%) PER (x) (1.1) P/ Cash Flow (x) 27.4 (0.4) 2.4 (1.4) P/ Book Value (x) Dividend Yield (%) ROE (%) (30.5) Net Gearing (%) P&L Analysis (RMmn) FYE June E 2012F Revenue Operating Profit (224.3) Depreciation (17.1) (17.1) (17.1) (18.7) Interest Expenses (19.5) (18.7) (17.7) (20.5) Pre-tax Profit (246.7) Effective Tax Rate (%) Net Profit (156.0) Operating Margin (%) (37.4) Pre-tax Margin (%) (41.1) Net-Margin (%) (26.0) Balance Sheet (RMmn) FYE June E 2012F Total Assets Fixed Assets Current Assets Non-current Assets Current Liabilities Non-current Liabilities Share Capital Shareholders Funds Share Price relative to the FBM KLCI We initiate coverage on Melewar Industrial Group Berhad with a Hold recommendation. We arrive at a target price of RM0.83 based on a CY12 PER of 5x. Melewar is essentially a steel pipe manufacturer and cold rolled coil producer via its subsidiary Mycron Steel Berhad with other business segments in the engineering and power industry. 1.0 Investment Highlight/Summary 1.1 ETP Catalyst Malaysia has embarked on the Economic Transformation Programme (ETP) and for the next 20 years there will be many high value big ticket projects that would need massive supply of steel. For example, in the near term there would be the LRT extensions, the KVMRT, the KL-Singapore High Speed Rail and other development projects. As such, there would be a strong demand for steel products to support these public-private sector initiatives. We believe that Melewar could potentially benefit from these initiatives which would drive demand for its steel pipes and cold rolled coils (CRC). 1.2 Robust Local Auto Industry We believe that moving forward the demand for steel from the local automotive scene would be resilient as demand is expected to rise to cater for future launches of new models. For the first 5 month of 2011, the total industry volume rose 3.4% with sales largely came from Proton and Perodua, which collectively contributed 142,808 units of the total 255,413 units for 5M11. As Proton and Perodua are major clients of Melewar, the total sales from Proton and Perodua will directly impact Melewar s bottomline. Having said that, we are positive as parts supply to Proton and Perodua is expected to increase following the launch of new models (ie: the new Saga facelift with CVT gearbox and Myvi). Source: Bloomberg Page 1 of 7

2 2.0 Key Investment Risks 2.1 Government Policies - Safeguard For Melewar s subsidiary to produce CRC, the group is forced to procure its supply of hot rolled coils (HRC) from Megasteel Sdn Bhd due to the import duty of 25% imposed on foreign steel imports. With the implementation of a proposed safeguard, the duty import might rise to 35%. Hence, the group is exposed to government policies and changes in policies could potentially affect the group s earnings negatively. 2.2 Softening Market For the past few years, the demand for steel products has been relatively weak due to the financial crisis, the slowdown in infrastructure construction, the lack of demand from the automotive and electrical sector and the threat of spikes in steel prices. Market sentiment has also been considerably weak with customers purchasing just enough to meet their minimum requirements. Moving forward, although our local shore is able to provide sufficient demand from the automotive and from the ETP driven infrastructure sectors, we are cautious that the group would not be able to pass on the cost from rising raw material prices and also the potential tax increase in imported steel to its customers. Maruichi Malaysia Steel Tube Berhad was listed on the Bursa Malaysia in In 1990, the company s corporate headquarters and its fifth factory were built at Persiaran Selangor. That same year also marked the commencement of operations of its subsidiary, Mycron Steel Berhad, the first CRC manufacturer in Malaysia. Mycron Steel Berhad was listed on the Main Board of Bursa Malaysia in June Corporate Structure Figure 1: Corporate Structure 3.0 Company Background/Overview 3.1 History In 1969, a Malaysian-Japanese collaboration into steel pipe manufacturing was established with the formation of Aurora Steel Tube Manufacturing Sdn Bhd. Production started in 1970 with just once production line in its factory along Jalan Gudang, Shah Alam. Maruichi Steel Tube Ltd, Osaka subsequently joined Aurora in the steel pipe production in 1972 and a new company name was incorporated Maruichi Malaysia Steel Tube Sdn Bhd. The company was then renamed Melewar Industrial Group Bhd in 2003 following a change in ownership. Within two years, the company expanded its operations; a second factory equipped with additional production lines and hot dip galvanising facilities went into operation on a 7-acre site in Jalan Utas, Shah Alam in In 1975 the company was converted into a public company. Come 1982, the company saw the opening of its third factory at Persiaran Selangor, Shah Alam and the commencement of operation of the company's 100% owned subsidiary, Melewar Steel Services Sdn Bhd, also in Shah Alam. 3.3 Management and Board Tunku Dato Ya acob bin Tunku Tan Sri Abdullah Aged 50, Malaysian Executive Chairman Appointed to the Board of Directors on 7 October 2002 Appointed as the Executive Chairman on 26 August 2008 Graduated with a Bachelor of Science (Hons) Degree in Economics and Accounting from City University, London. A Fellow of the Institute of Chartered Accountants in England & Wales (ICAEW) and a member of the Malaysian Institute of Accountants. Datuk Lim Kim Chuan Aged 51, Malaysian Executive Director Appointed to the Board of Directors on 1 October 2003 Page 2 of 7

3 TA Securities Stepped down as the Chief Executive Officer but remained as an Executive Director in charge of the Group Investments on 1 March 2010 Has over 31 years of experience in the finance and manufacturing industries. Azlan bin Abdullah Aged 52, Malaysian Group Managing Director/Chief Executive Office Appointed to the Board of Directors on 23 September 2002 Redesignated to the Group MD from ED on 1 June Holds a Bachelor of Science Degree in Business Administration from Trinity University, San Antonio, Texas, USA and a Masters Degree in Business Administration from Morehead State University, Kentucky, USA. 4.0 Key Areas of Operation 4.2 Cold Rolled Coil The group also produces CRC via its 54.8%-owned Mycron Steel Berhad and supplies them to steel coil centers, drum makers, pipe makers, galvanisers and automotive manufacturers. CRCs are also used for furniture, constructions, engineering and electrical appliances. Figure 4: Uses for CRC 4.1 Steel Tube and Pipes The group manufactures various types of pipes in different gauges and uses. The group produces steel pipes with diameters ranging from 9mm to 350mn, with thicknesses from 0.8mm to 9mm, with lengths up to 6m and with either plain or threaded ends. Figure 5: CRC Manufacturing Process Figure 2: Steel Tubes and Uses Types of Steel Tubes & Pipes Black and Carbon Steel Pipe Square and Rectangular Hollow Section Gas & Water Pipe Galvanised Steel Conduit Light Gauge Steel Plain & Lipped Channel Figure 3: Pipe Manufacturing Process Application For bicycles, vehicles, agricultural implements, civil engineering, steel towers, furniture, mining industries. For carrying gas, water, steam, oil, air. For electrical wiring For civil engineering, transportation & electrical communication equipment, machinery. 4.3 Steel Tubes & CRC Sales Figure 6: Monthly Steel Tubes Sales Tonnes Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Page 3 of 7

4 We note that there is a seasonal trend in the sales of Figure 9: CRC Sales Mix steel tube pipes. Sales are generally weaker in 1Q of the calendar year due to the shorter working month of February and also festivities. Moving forward, we expect 15% 0% Melewar to achieve an average sales figure of 5,800 22% Coil Centers tonnes of steel tube pipes a month for CY2011, 6,090 Pipes tonnes for year CY2012 and 6,380 for CY2013. Automotive Figure 7: Steel Tubes Sales Mix 53% 13% 6% 4% 3% 1% 20% Water Pipes Electrical Conduits Shapes & Sections Furniture Tubes Alum. Exhaust Pipes Others Black Pipes 24% 4% 35% Drum Makers Electro-Galvanisers Galvanisers CRCs are essentially used for products which require a more robust and rougher usage. Mycron primarily supplies CRC to pipe makers, drum makers and coil centers. To date, black pipes make up the lion s share of the group s total sales for steel pipes at 53% and furniture tubes make up 20%. Basically, black steel and furniture pipes do not require such a high quality grade of steel due to comparatively undemanding applications. As such, HRC and lower grade CRC would be the best input material for such usage, hence the lower cost and higher sales. Figure 8: Monthly CRC Sales Tonnes Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 A seasonal trend is evident from the Figure 7 above lower sales in 1Q due to festivities and shorter working days. We expect Mycron to achieve an average sales figure of 10,833 tonnes a month for CY2011 and CY2012 and 11,916 tonnes a month for CY2013. Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar Sensitivity Analysis For FY11, we have assumed an average HRC procurement price of USD810/MT and an average CRC procurement price of USD900/MT procured by the group. For FY12, we assumed a price of USD861/MT and USD918/MT for HRC and CRC respectively. Our sensitivity analysis indicates that for every USD10/MT increase in the input prices of HRC and CRC, bottomline would reduce by 4.8% and 8.4% for FY11 and FY12 respectively. 4.5 Factories Melewar currently has four factories in Shah Alam. Figure 10: Melewar s Factories Factory 1 Product Range: Round Pipes, Rectangular Pipes & Square Pipes Capacity: 8,000MT/Month (on 3 shift basis) Area: 196,144sqft (Land), 97,198sqft (Built-up) Factory 2 Product Range: Black Pipes, G.I. Pipes, Conduit Pipes Capacity: 11,000MT/Month (on 3 shift basis) Area: 316,300sqft (Land), 186,000sqft (Built-up) Factory 3 Product Range: Round Pipes, Rectangular Pipes, Square Pipes Capacity: 7,000MT/Month (on 3 shift basis) Area: 217,800 sqft (Land), 96,240sqft (Built-up) Factory 4 Product Range: Gate Channels, U-shaped channels, door rails, trolley tracks Capacity: 3,000MT/Month (on 3 shift basis) Area: 94,000sqft (Land), 28,000sqft (Built-up) Page 4 of 7

5 Mycron Steel Berhad s factory is also in Shah Alam. It sits on a 781,423sqft land size with a built-up area of 376,419sqft. Its installed capacity is around 21,666MT/Month. It is equipped with continuous pickling line, Hitachi 6-high cold reduction mill, electrolytic cleaning line, batch annealing furnaces, recoiling line and combined skinpass mill and tension leveling line. 4.6 Power Generation The group, via Siam Power Generation Public Company Ltd is licensed under the Small Power Producer programme to build, own and operate a 450MW combined cycle power plant in Rayong, Thailand. The first phase of the project would be 160MW combined cycle cogeneration gas fired power plant. The project cost around RM248mn and the PPA is for 25 years, index to USD with fluctuation in FOREX and energy cost pass through. Its off takers are EGAT (90MW) and G- Steel (70MW). In 3QFY11, the power plant contributed RM80.9mn to the group s revenue. 5.2 Margin Melewar s operating margin is fairly volatile and tough to predict. This is due to a number of probable factors such as demand, cost of steel and operating costs. With the price of steel being volatile and also the restrictions on imported steel, Melewar is highly sensitive to the price of steel. However, since 4QFY09, the group has been fairing reasonable well in maintaining a positive operating margin. Figure 12: Operating Margin % Revenue and Margin 5.1 Revenue Historically, Melewar derives its revenue from three sources. The main source however, is the sale of its steel pipes and CRC which constituted 97.1% and 98.9% of total group revenue in FY09 and FY10 respectively. The other two divisions which are relatively minor in terms of revenue contribution are the processing service income and consultancy and project services. An upcoming major revenue contributor moving forward is expected to be its power business. Figure 11: Revenue Breakdown RMmn Financial Review For the past 14 years, the group s earnings have been rather volatile. In year 2010, it posted a PBT loss of RM246.7mn and in year 2007, the group achieved an annualised PBT gain of RM133.48mn. For the past 14 years, the group achieved a very modest PBT CAGR of 3.9%. Gearing has always been kept at a reasonable level in comparison to its industry peers. In year 2010, net gearing was at 1.6x, up from 0.9x the year before. From year 2006 to 2009, net gearing was below 1x. The average industry net gearing level is currently at around 1.5x. Losses in FY09 of RM246.7mn were caused by a few reasons. The main causes were the mark-to-market loss on Gindalbie Metals Ltd shares of RM172.5mn at AUD0.77/share and impairment loss on M3nergy Berhad of RM43.1mn. RM41.4mn of litigation provisions were written back as well. Excluding these, the pretax loss would have been RM72.5mn for that year Consultancy & Project Services Processing Services Income Sale of Goods Page 5 of 7

6 7.0 Developments 7.1 Expansion in the Auto Industry Melewar s subsidiary Mycron is currently supplying automotive grade CRC to Proton Holdings Berhad for its Proton Persona, Proton Saga and Proton Exora MPV models. For the Proton Persona model, Mycron supplies 7 parts totaling 40.9kg per car with a total material consumption of more than 143tonnes/month. The Proton Saga model gets 9 parts totaling 30.29kg per car by the company with a total material consumption of more than 212tonnes/month. The Proton Exora gets 19 parts from the company totaling 56kg per car with a total material consumption of more than 140tonnes/month. This year, the group is targeting to supply parts for Perodua, in particular the Perodua Myvi. Perodua has recently completed test and evaluation of the division s CRC, for use in 23 of its motor vehicle components. The division is targeting to commence the supply of CRC to Perodua, during the 2011 calendar year. We believe that a tie up with Perodua should help sustain the group s earnings going forward as Perodua and Proton are neck-to-neck in being the market leader in the local automotive scene. 7.2 Safeguard Issue Melewar currently procures 100% of its HRC (nonauto grade) supply from Megasteel Sdn Bhd as encouraged by the government. The main reason why the group has to procure its supply of HRC locally was due to the 25% import tax levied on imported HRC. Channel checks and industry research indicated that given a choice, local players would prefer to import steel from countries such as Japan due to its superior quality. Local HRC are mainly derived from scrap metal which makes it inferior, and in turn makes the CRC produced inferior. This inferior CRC would then limit the market scope as to which local CRC could be sold to. For example, only superior quality CRC could be used to manufacture high quality electrical goods like microwaves and rice cookers. CRC of inferior quality on the other hand are used to produce cheaper products like office furniture. Before the liberalization of steel imports declared by the Ministry of International Trade and Industry (MITI) on 1 August 2009, downstream players are taxed 50% for 60% of their total flat steel imported. However, they are now taxed 25% which will subsequently reduce to between 0% and 10% from January 1, Megasteel is currently lobbying for a safeguard against steel products which are available locally. If the safeguard is approved by the government, we could see import duties rising to 35%. We believe that this could severely bite into margins for local players coupled with rising material costs which is getting tougher to be passed on to its customers. MITI indicated that they would come up with a preliminary determination by end-july. After the preliminary determination, if MITI finds a probable case, then it would impose provisional measures, either a quota on imports or increase in duty. Otherwise, the case would be dropped. 8.0 Future Plans 8.1 Plant Expansion, Catch-22 scenario Currently, the market for HRC and CRC is soft due to cost and demand pressures. Hence, industry experts opine that this is most probably a good time to conduct plant expansions as machineries such as mills, furnaces and other steel industry related machineries would be cheaper in a soft market. In our opinion, we think that it is possible that sometime in the next 1 to 2 years, Melewar and/or Mycron might embark on purchasing new processing lines as a backup machine or as an addition running line in anticipation of future bull demand from the ETP projects. Although demand is not that great now, procuring cheaper machineries now could possibly be a good move in anticipation for greater demand in the future. We would estimate the cost of plant expansion and machineries procurement to be in the range of RM150mn to RM200mn. 8.2 Electro Galvanising Business The group is currently considering venturing into the electro galvanizing (EG) steel coil business. Currently, there are only a handful of EG players in the country. One of the more prominent player in EG production is Nippon EGalv Steel Sdn Bhd, a 67.22%-owned indirect subsidiary of Bursa Malaysia Main Market listed company Tatt Giap Group Berhad. EG steel is used for higher quality products such as computer parts, window frame, door frame, automotive parts, home appliances, and audio visual components. 9.0 Earnings Outlook For FY11, we project an earnings contraction of 53.1% to RM31.7mn from RM67.6mn. For FY12, we expect earnings to pick up momentum, registering a YoY growth of 16.2% to RM36.8mn. On the other hand, we expect continuous topline expansion of 0.3% for FY11 and 15.6% for FY12. The growth from FY11 to FY12 would be partially fueled by it power generation division in Thailand. We also expect PBT margin to taper off to a range of 7.3% to 7.5% for FY11 to FY13. This is due to the rising input costs such as metal prices, electricity and labour. Page 6 of 7

7 10.0 Dividend Policy The group targets to pay out around 25% of its earnings. Judging from its outlook on a probable softening in its business conditions, we opine that the group would target a payout in the range of 10% to 15% of its profits. This would translate to a gross dividend of 2sen/share for FY11 and FY Valuation We value Melewar at RM0.83/share based on a 10-year historical trailing PER of 5x. We recommend investors to Hold. We are in the opinion that moving forward, there are no near term business catalyst which would provide good earnings boost for the group. Demand for its steel tubes and CRC is expected to remain weak and contribution from its power generation in Thailand is projected to remain stable Recommendation We recommend investors to Hold on this stock for the time being as there are no immediate near term catalyst for the group s earnings moving forward. Financial Summary (RMmn) Income Statement (FYE June) F 2012F 2013F Balance Sheet (FYE June) F 2012F 2013F Revenue PPE Cost of Sales (621.2) (618.1) (622.4) (719.9) (764.4) Prepaid Lease Rentals Gross Profit (21.7) Associates & JV Others EBITDA (206.6) LT Assets Depreciation (17.1) (17.1) (18.7) (20.9) (22.2) Amortisation (0.5) (0.5) (0.5) (0.5) (0.5) Inventories EBIT (224.3) Trade and Other Receivables Finance cost (19.5) (18.7) (17.7) (20.5) (21.7) Others Associates (2.9) Cash & Bank Balances ST Assets Profit Before Tax (246.7) Tax 74.0 (12.6) (13.3) (15.2) (15.9) Total Assets MI 16.7 (11.4) (8.3) (8.7) (9.3) Profit After Tax (156.0) ST Borrowings Trade & Other Payables EPS (sen) (68.8) Others Gross Dividend (sen) ST Liabilities Dividend Yield (%) LT Borrowings Cash Flow (FYE June) F 2012F 2013F Deferred Tax Liabilities PBT (246.7) LT Liabilities Depr & Amort Asso. & JV 2.9 (1.9) (1.9) (1.9) (1.9) Share Cap OP/(L) before changes in WC Share Premium Changes in WC 98.7 (144.8) (28.0) (34.8) (15.8) Treasury Shares (2.0) (2.0) (2.0) (2.0) (2.0) Tax & Interest (15.3) (22.3) (31.0) (35.7) (37.7) Reserves CFO (64.9) Equities MI Capex (109.7) (458.4) (115.0) (150.0) (100.0) Others (6.9) Liabilities & Equities CFI (116.7) (392.9) 36.8 (150.0) (100.0) Ratios F 2012F 2013F Net Addition/Rpmt (85.0) EPS (sen) (68.8) Dividend Paid (8.9) 0.0 (4.5) (4.5) (4.5) Payout ratio (%) Others (103.2) PER(x) - based on current price CFF (58.3) (89.5) Gross margin (%) (3.6) NET CASH CHANGE (52.3) (6.3) (20.9) (25.6) 47.9 EBITDA margin (%) (34.5) EBIT margin (%) (37.4) Beginning Cash PBT margin (%) (41.1) Net Addition/(Subtraction) (52.3) (6.3) (20.9) (25.6) 47.9 Net profit margin (%) (26.0) Currency Translation Diff. 5.1 (6.5) Restricted Cash Net Gearing (x) Ending Cash Net Debt (RMm) ROE (%) (30.5) ROA (%) (13.5) NTA (RM) P/NTA (x) Disclaimer The information in this report has been obtained from sources believed to be reliable. Its accuracy and/ or completeness is not guaranteed and opinions are subject to change without notice. This report is for information only and not to be construed as a solicitation for contracts. We accept no liability for any direct or indirect loss arising from the use of this document. We, our associates, directors, employees may have an interest in the securities and/or companies mentioned herein. This report has been prepared by TA SECURITIES HOLDINGS BERHAD for purposes of CMDF-Bursa Research Scheme ("CBRS") administered by Bursa Malaysia Berhad and will be compensated to undertake the scheme. TA SECURITIES HOLDINGS BERHAD has produced this report independent of any influence from the CBRS or the subject company. For more information about CBRS and other research reports, please visit Bursa Malaysia s website at: for TA SECURITIES HOLDINGS BERHAD(14948-M) (A Participating Organisation of Bursa Malaysia Securities Berhad) Kaladher Govindan Head of Research Page 7 of 7