Investment Highlights

• We slash our FY19–20F net profit forecasts by 50% and 52% respectively, as we expect intense competition in the local flat steel market to persist over the medium term in the absence of substantive measures introduced by the government to curb the influx of cheap imports. However, we keep our FV unchanged at RM1.09 as we change our valuation methodology to 0.5x book value (consistent with its historical average during the last flat steel downcycle in 2012–2015), from a P/E-based one previously.

• CSC Steel’s FY18 net profit disappointed, missing our forecast and consensus estimates by a whopping 25% and 29% respectively. The variance against our forecast came largely from more severe-than-expected erosion in margins.

• FY18 turnover grew 4% 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 reporting growth but GI and PPGI showing weaker performance. In terms of sales value, CRC made up 45% of total, followed by GI (32%), PPGI (21%) and scraps (2%).

• However, FY18 net profit shrank by more than half from a year ago on the back of higher costs of inputs i.e. hotrolled coil (HRC) and zinc, and transportation, coupled with the change in product mix skewing away from the high-margin 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 - 27 Feb 2019