Investment Highlights

• We cut our FY20F net profit forecast by 13% but upgrade our call on CSC Steel to a BUY from HOLD as value has emerged after the recent steep correction in its share price. Our FV remains at RM1.09 based on 0.5x its book value which is consistent with its historical average during the last down cycle in the flat steel sector in 2012–2015.

• The earnings downgrade is largely to reflect: (1) softer demand for flat steel as activities in the manufacturing sector (the key consumer of flat steel) have been disrupted or come to a complete halt during the 28-day movement control order (MCO) period; and (2) weaker prices averaging at RM2,500/tonne, about 9% lower vs. RM2,750 a year ago, due to sluggish demand coupled with the presence of cheap imports in the market.

• These are partially mitigated by the lower cost of input hotrolled coil (HRC). In 1QFY20, international HRC prices averaged at US$560/tonne, 22% lower vs. US$720/tonne a year ago.

• We remain cautious on the prospects of the local flat steel sector amidst the economic slowdown while competition from cheap imports in the market remains unabated. While safeguard measures have been put in place by the government to protect the local players, these 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 share at the expense of margins.

• Nonetheless, at the current price, we believe the market has over-reacted to the downside. Also, at the current level, we believe the share price will be very well supported by a dividend yield of 7% per annum, which in turn is underpinned by a strong balance sheet with a net cash of RM249.4mil or 67.5 sen/share as at 31 Dec 2019.

Source: AmInvest Research - 30 Mar 2020