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Group’s business and operations

Masteel’s principal business activities involve in the production of steel billets and steel bars which comply with the
Malaysian standard (MS 146:2016) for the construction sector. Masteel also has an associate company which is a Bio Nexus certified company that manufactures radioisotopes which are used by hospitals for cancer imaging. These products are in full compliance with the Ministry of Health of Malaysia’s National Pharmaceutical Regulatory Affairs (“NPRA”) regulation and standards.

The main driver of revenue for the Company is from the sales of steel bars and steel billets.

 

 

 

 

 

The distribution between local and export sales for the year under review is as follows:

 

 

 

 

 

 

The associate company which manufactures radioisotopes for the imaging of cancer cells has seen rapid growth in
revenue for the last 3 years.

 

 

 

 

 

 

The manufacturing facilities of Masteel are located in Petaling Jaya and Bukit Raja, Klang, Selangor. The geographical presence of the sales of its steel bars are primarily in the Klang Valley, Johor and the East Coast of West Malaysia. Its radioisotopes manufacturing facility is located in Bandar Enstek, Negeri Sembilan. The main market for its radioisotopes are hospitals throughout Peninsular Malaysia.

The sales revenue from steel bars in the past 5 years is as follows:

 

 

 

 

 

 

The production capacity of billets and bars are as follows:

 

 

 

 

 

 

 

Business objectives

The objective of the manufacturing activities are to maximize shareholders’ value through the generation of maximum profits by increasing sales volume and widening profit margin per mt with the utilisation of minimum overheads and capitals.

Whilst the Company is constantly striving to improve its output through the upgrading of its plant and machinery, it is also diligently looking towards establishing new strategic partnerships and joint ventures with other steel mills to increase its capacities and expand into other steel products for its home market and new markets in the ASEAN region.

Ongoing research and development on the technology and methodology to improve the efficiencies and reliability of the manufacturing facilities are key agendas for the management of the Company. The reduction in steel melting time will reduce energy used and the switch to using lower cost scrap which constitutes 60% to 70% of the production costs enable the Company to keep the costs of production in check.

The Company possesses well trained and experienced workforce which is accustomed to the challenges of the cyclical nature of the steel business and the harsh working environment of the heavy steel industry.

The complexity of ensuring consistently high utilization rate of all manufacturing facilities is a major factor that can affect the costs and competitiveness of its products. The Company has in place a stringent and comprehensive training, inspection and maintenance programs with extensive incentives and penalty schemes to ensure the fullest compliance. Other external factors such as market pricing, exchange rate fluctuations and cost push factors are harder to mitigate and anticipate.

It is the business philosophy of the Company to be prudent when expending its financial resources and is constantly remaining vigilant and learned about future trends.

Financial Results and Financial Condition

Review of operating activities includes discussions on the main factors that may affect the operating activities are as follows:

(a) The sales revenue increased to RM1.2 billion for the year under review, i.e. an increase of 5% from the previous year.

(b) The profitability of the Group saw a turnaround from a loss of RM50.4 million in 2015 to a profit of RM21.4 million for the financial year under review.

(c) The capital intensive steel making facilities’ output was driven by market demand, duration of festive holidays and scheduled and unscheduled plant outages. The utilization rate improved to 80% from 71% as compared to the previous year. The new rolling mill that began its operation in early 2016 produces 63.5% of premium size steel bars based on the plant’s designed capacity and this output was mainly driven by the learning curve of the new plant operators.

The cyclotron at the radio pharmaceutical production facility is targetted to produce its record output of radioisotopes from 101,000 mCi in 2016 to 122,000 mCi in 2017 (21% higher) due to more hospitals installing Positron Emission Tomography – Computed Tomography (“PET-CT”) scanners throughout Central and Southern Peninsular Malaysia.

The required equipments and appropriately trained manpower have been deployed at all manufacturing facilities for the realization of the above mentioned capacities.

The financial outcome of the Group other than being driven by the above capacities is also affected by actual sale volumes, selling price and input raw material costs. In addition, the magnitude of energy cost increase, labor and financial costs will also affect the final financial outcome of the Group.

A number of technology packages will be installed in the plants in the ensuing 12 months and the speed and successful implementation of these equipments will also affect the profitability of the Group.

The tactical business direction is to further improve the output of the steel making plants by maximizing the existing equipments to achieve a higher level of economies of scale that would reduce the total costs of production and improve the bottom line. The concurrent improvement of its sales volume will be to target more new end users such as GLC’s and main contractors in West Malaysia and new dealers in East Malaysia. To enhance its sales volume by 15%, the Company is actively pursuing new sales opportunities for its products in Sabah and Sarawak in anticipation of the heightened demand for steel with the construction of the RM16.49 billion Pan Borneo Highway that will be implemented from 2017 till 2022.

The following are the risk factors that could affect the financial performance of the Company:

(a) weakness in market demand will be countered by more proactive marketing efforts by offering longer payment terms and exporting more to regional markets.
(b) costs increases will be mitigated by striving for higher output with the implementation of new technology packages and manpower retraining.
(c) forex losses, to reduced the exposure of foreign currency obligations by replacing 50% foreign currency obligations with local currency.
(d) plant’s unplanned outages to be reduced (from current 41.3 days per year) by more extensive equipment inspection and repair and/or replacement. Review of the adequacy of spare parts inventories and back up equipment.

Financial section of the company

1) In the FYE 2016, the global selling prices of steel bars, in particular China-made bars, had improved. Furthermore, with the lower imported long steel products, the demand of our locally manufactured steel bars had also increased. Consequently, our Company’s turnover for the FYE 2016 had also increased by 5.51% to RM1.206 billion compared to RM1.143 billion in FYE 2015.

2) In line with the improved selling prices of steel bars coupled with higher gross profit margin being derived from the sales of our premium small diameter bars which are being produced from our new rolling mill in Bukit Raja, our Company achieved a net profit before tax of RM24.68 million in the FYE 2016 compared to a net loss before tax of RM45.89 million in the FYE 2015.

3) In line with our Company’s commendable turnaround, our Company’s shareholders’ funds had also increased by 3.90% to RM551.77 million for the FYE 2016 compared to RM531.99 million in the previous year.

4) In the FYE 2016, our Company’s trade receivables increased by 22.7% to RM150.61 million from RM122.71 million in previous year mainly due to an improvement in our sales and longer credit terms.

5) In the FYE 2016, our Company’s trade payables increased by 57.1% to RM193.56 million from RM123.21 million in FYE 2015 due to an increase of supplier’s credit amount.

6) Due to a longer average payment period in the FYE 2016, our Company’s cash and bank balances increased 307% to RM60.71 million from RM14.91 million in the previous year.

Forward looking statements

With the good progress of the consolidation of the Chinese steel sector which accounts for over 55% of the world’s steel making capacity, steel prices globally had rebounded by approximately 100% from the lows of January 2016. Prices are expected to remain firm for the next 12 months. The Company is targeting to increase its production volume by 8% resulting in further improvement of economies of scale and lower production costs.

The anticipated lower levels of volatility in terms of margin will augur well with the increased production volumes and sales.

The anticipated improvements in the output of the new rolling mill in its second year of operation will earn the Company an additional revenue of RM150.0 million, equivalent to an increase of 12.5% in revenue for the year ahead.

In the radio pharmaceutical division, the quantities of radioisotopes to be sold is expected to increase by 20% with
the commencement of new cancer imaging facilities at three (3) new hospitals and the organic growth of 5-6% from
existing hospitals.

The closure of many steel bar making facilities in the country coupled with many public infrastructure works being rolled out, the demand for the Company’s steel products is expected to be well supported.

The ongoing initiative by the Company to acquire new steel making business entities that is fairly valued, offers cost competitive technology and are synergistic to the Company’s business objectives of enhancing shareholders’ value and building a sustainable and competitive business is in progress.

The entry into the Malaysian market by foreign steel mills producing similar product is a major concern and the Company has made repeated representations to the authorities to prevent such investments from materializing in view of the fact that there are still some local steel mills operating at below its capacity. Further weakening of the Ringgit will exacerbate the costs of raw material and make the upgrading and replacement of plant and machinery more costly. The Company will strive to adhere to its 10% dividend payout on its profit after tax. Distribution of Bonus Issue shares from its reserves is being considered by the Board of Directors.

 

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