Investment Highlights

• We raise our FY19–21F net profit forecasts for CSC Steel by 20% each but keep our FV of RM1.09 based on 0.5x its book value which is consistent with its historical average during the last downcycle in the flat steel sector in 2012– 2015. Maintain HOLD.

• CSC Steel’s 1HFY19 net profit exceeded expectations, coming in at 68% of both our full-year forecast and the fullyear consensus estimates. We believe the variance against our forecast came largely from: (1) the softening cost of input hot-rolled coil (HRC) during 2QFY19; and (2) the higher-than-expected sales volume of key product cold-rolled coil (CRC).

• 1HFY19 turnover eased 2% YoY as higher CRC sales were offset by the decline in sales of galvanized steel. However, 1HFY19 net profit dropped by a larger magnitude of 18% YoY due to margin squeeze as the cost of input HRC rose at a faster rate vs. the price of end-product CRC. HRC prices shot up during the period on the back of a supply disruption of iron ore (which is in turn the input of HRC) in Brazil.

• The earnings upgrade is largely to reflect, over our forecast period, higher CRC sales volumes on slightly reduced competition from imports with the imposition of higher anti-dumping duties of 3–42% on CRC imports from China, South Korea and Vietnam, for five years effective May 2019 vs. 3–24% previously.

• Also, we expect better CRC margins, underpinned by more benign iron ore and hence HRC cost over our forecast period. At present, international iron ore prices have eased to US$90/tonne vs. an average of US$100/tonne in 1HFY19.

• We remain cautious on the prospects of the local flat steel sector amidst steep competition from cheap imports in the market. While safeguard measures have been put in place by the government to protect the local players, they may not completely eliminate the loopholes. With cheap imports still flooding the local market, we believe the local flat steel producers, CSC Steel included, will have no choice but to defend their market shares at the expense of margins.

Source: AmInvest Research - 27 Aug 2019