THE "IRON MEN" - ANALYSIS OF LONG STEEL COMPANY IN MALAYSIA

There are 4 major listed long steel companies in Malaysia, we call it as the "Big Four". They are:

1. Ann Joo Resources Berhad (安裕资源有限公司）

2. Southern Steel Berhad （南达钢铁）

3. Lion Industries Corporation Berhad （金狮工业）

4. Malaysia Steels Work (M) Berhad （大马钢厂）

Their main products are long steel and steel-related product, eg. steel bar, billet, wire rods, which main customers are from construction and infrastructure industries. Due to the similar nature of business, I will analyse the Big Four's together in this article.

Accounting is becoming a global business language. To understand a business's story, we need to look at its financial statements, to analyse whether it's a ably-managed business.

FINANCIAL POSITION

Given the capital intensive nature of steel industry, maintaining a strong financial position is a key priority of the company. Hence, I will pay more attention on its book value and capital structure. 

Net Cash / (Debt)

First, let us look at their cash position. A company that is rich in cash has higher chance to survive during crisis. Given the highly uncertain nature and fluctuation of business in cyclical industry, a business may face cash flow problem if it has high borrowing during market downturn.

LIONIND's cash position seems attractive compare with the other 3 players which are in net debt position. It's net cash per share is RM 0.16, which means if you invest LIONIND at current share price of RM 0.25, you will immediately own RM 0.16 of its cash! 

Debt-to-Equity

Again, LIONIND has relatively low debt-to-equity compare with others, which is just 11%! From here, we can assume LIONIND is really well in managing its debt position. 

SSTEEL has the highest debt-to-equity ratio, which may face higher solvency risk, as its capital is mostly rely on debt. 

Book Value per Share

Among the Big Four, LIONIND has the highest book value, or net asset per share, followed by ANNJOO, SSTEEL and MASTEEL. With current share price, four of the steel players are extremely undervalued, which are currently trading at discount in the range of RM 1.38 to RM 2.12. 

Book value is the money that we get when the company is in liquidation. It's a very reliable measurement to value a company when it's in liquidation position. But, when investing in stock market, we won't expect the company is going to liquidate soon - in fact I wouldn't buy it if this is the case. 

    

 FINANCIAL PERFORMANCE

As a value investor, I will seek to purchase a business that is able to generate highest profit to me. The improvement in profit will reflect in the increment in share price and dividend. That's the money that directly put into our pocket. 

Let us move on to income statement, beginning with the top line (Revenue), LIONIND has the highest revenue, which in line with its capacity in producing long steel product (billet/bloom/beam), followed by ANNJOO and SSTEEL. But on October 2019, ANNJOO and SSTEEL have entered into a Memorandum of Understanding to form a joint venture company in relation to their long steel manufacturing business. Based on the latest announcement on 6 April 2020, the agreement is expected to be signed before 6 July 2020.

The consolidation of two major steel players will substantially strengthened their position as the dominant steel player in Malaysia. Consolidation is essential for current steel market. Both ANNJOO and SSTEEL are able to enhance their dominant position in local market to compete with foreign country's steel, especially China, by achieving greater economies of scale through higher bargaining power in purchasing of raw material and potential larger customer base. 

I will not put so much attention to Alliance Steel in this article. This is because Alliance Steel is a China steel company, which its main function is to manufacture and export steel product to ASEAN country.

Next, let's look at their profit margin. For those who are not really familiar about steel industry, I would like to highlight that steel industry is doing well on 2016 and 2017 due to rise in steel price and increase in demand in local market which mainly due to production cut by China and commencement of mega infrastructure project eg. ECRL, High Speed Rail, Bandar Malaysia etc. ANNJOO has the most excellent profit margin when the market is doing well. ANNJOO is highly regarded as one of the lowest cost producer of long products as it operates the only hybrid Blast Furnace-Electric Arc Furnace (BF-EAF) in Malaysia. By using BF-EAF, ANNJOO has the flexibility of choosing hot metal or scrap mix, based on their price, to generate energy.

Although ANNJOO's financial position is not as good as LIONIND, investors are willing to pay more price for its profit generating ability. Based on their market capitalization as at 12 May 2020, ANNJOO has the highest market capitalization among the four players. LIONIND, which has the best financial position, has the second lowest market capitalization. This has proven that investors are more concern on a company's profit than its financial situation. The company with best business performance will be given the highest value. However, we shouldn't ignore its financial situation. A company with a strong balance sheet will support its business goals and maximize financial performance.