Investment Highlights

• We cut our FY18-20F net profit forecasts by 26%, 10% and 10% respectively, reduce our FV by 10% to RM1.09 (from RM 1.21 previously), but maintain our HOLD call. Our new FV is based on 8x revised FY19F EPS, at a slight discount to its historical 1-year forward P/E of 9-10x to reflect its weak earnings outlook currently.

• CSC Steel’s 9MFY18 net profit came in below expectations at only 61% and 52% of our full-year forecast and the full-year consensus estimates respectively. The variance against our forecast came largely from more severe-than-expected erosion in margins.

• 9MFY18 turnover grew 7% YoY thanks to higher selling prices for all the three key products, i.e. cold-rolled coil (CRC), galvanised steel (GI) and pre-painted galvanised steel (PPGI), while sales volumes were mixed with CRC and PPGI reporting growth but GI showing weaker performance. In terms of sales value, GI made up 40% of total, followed by CRC (37%), PPGI (21%) and scraps (2%).

• However, 9MFY18 net profit almost halved from a year ago on the back of higher costs of inputs (i.e. hot-rolled coil (HRC) and zinc) and transportation, coupled with the change in product mix skewing away from the highmargin GI. With cheap imports flooding the local market, we believe CSC chose to defend its market shares at the expense of margins. It substantially absorbed the higher costs.

• We remain cautious on the prospects of the local flat steel producers amidst steep competition from cheap imports in the market. Pending further anti-dumping investigation, and subject to the outcome, and the imposition of more safeguard measures by the Ministry of International Trade and Industry (Miti), the local flat steel players will continue face margin compression as they are unable to adequately raise prices to pass on the higher production cost including input HRC, transportation and electricity.

Source: AmInvest Research - 29 Nov 2018