MEGASTEEL closure: Impact to MYCRON & CHOO BEE going forward
There are two types of HRC, Iron Ore based HRC and Scrap based HRC.
Scrap based HRC produces Scrap based CRC and Iron Ore based HRC produces Iron Ore Based CRCbefore being used in the next downstream manufacturing process.
Scrap based CRC is used by downstream manufacturers mainly in the Steel Tube and Furniture sectors.Iron Ore based CRC (higher grade) is used for Automotive industry application and Electrical appliances. Refer Link 1 below, Page 8 under Domestic CRC structure for details.
Megasteel produces only Scrap Based HRC
(A) Let us first determine how much does Mycron use Scrap Based HRC per annum as its raw material.
It is reported on Financial YR 2015 annual report that it uses ‘Scrap based HRC’ as its raw material solely from Megasteel for its Steel Tube manufacturing segment. Refer Link 1, page 12 second paragraph on its annual report.
Link 1: Mycron Annual Report
http://cdn1.i3investor.com/my/files/dfgs88n/2015/11/06/1483789631--639706738.pdf
Referring to Melewar’s annual report, one can see the total throughput in tons of HRC processed as 73 ton / annum with the last qtr reaching 20 ton/qtr at 55% of its rated capacity, refer Link 2 Section ‘1.3 Steel Tube Operations’ on Table 4. My estimation for 2016 based on the reported revenue of RM 206M for the Steel Tube segment alone comes to approximately ~ 90 ton /annum of Scrap based HRC processed.
Link 2: Melewar Annual Report:
http://www.melewar-mig.com/investorsinfo_cmmsg.html
Note that Scrap based HRC which is cheaper can only be used for such Tube segments unlike for Car Manufacturing application and other higher quality CRC making which requires Iron Ore based HRC. So it is important to note that only Scrap based HRC users in the market stand to gain and not the Iron ore based HRC users unlike what ‘SuperInvestor’ had highlighted vaguely for steel manufacturers, due to Megasteel closure.
Another one good example of beneficiary is Choo Bee who uses Scrap Based HRC for its Manufacturing section. Mycron’s Iron ore based HRC are sourced internationally for its CRC making segment, refer Link 2 section 1.2 Cold Rolled operation 2nd paragraph after Table 3. The expected gain on the Iron Based CRC making segment is beyond this article’s scope as we are only concern on Megasteel closure impact.
(B) Now let us determine realistically what would be the reduction on the cost of Scrap Based HRC when sourced externally, now that Megasteel is closed?
Of course we have to assume now, the Duty imposed for import of HRC will be removed as it does not make sense to retain it as there is no longer anyone to be protect for. To get an idea, we should find out what was the duty imposed. Please refer Melewar’s annual report under section 1.5 paragraph number 9. It says the existing import duty is 15%.
Link 2:
http://www.melewar-mig.com/investorsinfo_cmmsg.html
Note that Megasteel had demised while 'gasping' for an additional 40% duty to restrict the cheaper HRC supply from China (makes me wonder how big the price difference was from external source! smiley )
Using an estimated cost of HRC from WealthWizard publishing earlier – link 3 below as RM 1600 per ton, the duty value of 15% translates to 15% x RM 1600 per ton as ~ RM 240 per ton.
Link 3:
http://klse.i3investor.com/blogs/wealth123/103812.jsp
Further note that as per below news from TheEdge dated 13 June, Megasteel is charging a premium of RM 400 – 500 per ton for the Scrap Based HRC – refer Link 4.
Link 4:
http://www.klsescreener.com/v2/news/view/81555
Using the above 2 information, and conservatively placing a 50% discount to cater the market dynamics to reach an equilibrium, we can safely say that the Scrap Based HRC users will at least benefit by RM 250 per ton by externally sourcing their Scrap Based HRC. (Frankly speaking I don’t see any reason why they could not save as being claimed by Mr Tan).
(C) Now let us see the impact on the bottom line for Mycron, by multiplying the throughput above of `73 ton/annum by the Savings of RM 250 / ton and the Tax rate of 25% to obtain: PAT of 18.3 Million per annum.
This translates to additional EPS of 5.0 cents on top of the normalized EPS of 22.4 cents based on the Projected next 4Q net profits of 63.3M by WealthWizard as per below article earlier:
Link 5:
http://klse.i3investor.com/blogs/wealth123/103812.jsp
Similarly, one can easily calculate for Choo Bee based on their reported processing capacity of 108 ton per annum, though I am not sure on its utilization rate………I leave the surprise number to be discovered by the readers.
One can view the additional EPS as a Margin of Safety if they like..especially those who are extra conservative.
As such i see with SUFFICIENT CLARITY a very bright future for Mycron and Choo Bee
No vagueness here...
MYCRON (5087) - Megasteel Closure: Impact on Mycron & Choo Bee
http://klse.i3investor.com/blogs/Insight1/104546.jsp
