Investment Highlights

• We raise our net profit forecast for CSC Steel by 17%, 15%, and 1% for FY19–21F respectively, 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 9MFY19 net profit exceeded expectations, coming in at 90% and 92% of our full-year forecast and the full-year consensus estimates respectively. We believe the variance against our forecast came largely from: (1) the low cost of input hot-rolled coil (HRC) during 3QFY19; and (2) higher sales volume of its key product cold-rolled coil (CRC).

• 9MFY19 turnover was relatively flat YoY as higher CRC sales were offset by lower sales of galvanized steel (GI) and pre-painted galvanized steel (PPGI). However, 9MFY19 net profit rose by 16% YoY backed by improved margins coming from the low cost of input HRC (averaged at US$650/tonne vs. US$800/tonne a year ago), coupled with lower operation expense such as export marketing, etc.

• The earnings upgrade is largely to reflect 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.

• 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$87/tonne vs. an average of US$105/tonne in 9MFY19.

• 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 - 25 Nov 2019