Masteel: A small loss...

Results Update

Masteel has released its quarterly results for QE31/3/2015. Its  revenue dropped by RM66.78  million  to RM325.39 million mainly due to lower selling price and sales volume. It recorded a loss before tax of RM9.90 million as compared to profit before tax of RM6.19 million achieved in QE31/12/2014 due to lower profit margin.


Diagram 1: Masteel's 11 quarters' PL & CF (Source: ShareInvestor.com)


Chart 1: Masteel's 11 quarters' PL & CF (Source: ShareInvestor.com)

Financial Position as at 31/3/2015

Masteel has adequate liquidity as reflected by its current ratio of 1.16X. Its leverage is elevated as with gearing ratio at 0.93X. Debtors' & Inventory Turnover periods stood at 47 & 99 days, respectively.

Looking at the Balance Sheet, we can see a big swing in the Debtors & Inventory numbers. This is likely due to changes in accounting treatment requested by external auditor. More on the external auditor's concern below.

 
Table 1: Masteel's Balance Sheet as at 31/12/2014 & 31/12/2009

Qualification of Audited Account for FY2014

Masteel has filed in its audited financial statements for FY2014 (here). Its external auditor, Nexia SSY qualified Masteel's accounts for FY2014 due to 2 main concerns:

(a) Classification: The treatment/ classification of an amount due to a multinational commodity trader as at 31 December 2014 as Trade Deposit for purchase orders that were continuously cancelled. These deposits should be treated as financing arrangement. 

(b) Validity and Recoverability: The recoverability of the balances from certain trade debtors where credit entries and other adjustments were made to offset amount owing by these debtors against amount owing to the same parties (for purchases of steel products). In addition, this adjustment may lead to specific misstatements in the financial statements.

Subsequently, Masteel has appointed UHY carry out a Special Audit Report to address the concern of Nexia SSY. UHY’s findings are:

(a) Classification: UHY was satisfied that the advance payments received from the aforesaid multinational commodity trader had been correctly accounted for by the Company as trade deposits in accordance with the Malaysian Financial Reporting Standards.

(b) Validity and Recoverability: UHY was satisfied that the transactions with the trade debtors under review are properly supported evidentially. UHY has also ascertained with reference to events post 31 December 2014 that the amounts due from the trade debtors under review have been fully repaid and/or settled in accordance with the agreed trade credit terms.

After this unpleasant episode, Nexia SSY did the obvious thing of seeking reappointment as external auditors of the Company. To Masteel, the damage has already been done. It will take a long while before the stock will ever be treated without suspicion again.

Technical Outlook

Masteel's share prices dropped sharply after the announcement of the external auditor's reservation about the account in late April. Masteel ceased trading on May 11. This has certainly spared the share further selling due to recent market upheaval. When Masteel finally reopens for trading, it would retest the horizontal support at RM0.60 again. Will that support hold up the stock? We will have to wait & see.

Chart 2: Masteel's monthly chart as at Jul 2, 2015 (Source: ShareInvestor.com)

Conclusion

Due to the poor industrial outlook for steel sector plus the cloud of uncertainty surrounding this stock, Masteel is likely to remain weak for the while. The share price has dropped significantly but so did many other steel stocks. Masteel is neither cheaper nor more attractive than its peer. Based on this, it is best to avoid this stock for now.

Note:
In addition to the disclaimer in the preamble to my blog, I hereby confirm that I do not have any relevant interest in, or any interest in the acquisition or disposal of, Masteel.