Investment Highlights

• We cut our FY20F net profit forecast for CSC Steel Holdings (CSC Steel) by 36%, but maintain our BUY call and fair value of RM1.09 based on 0.5x its book value. This is consistent with its historical average during the last down cycle in the flat steel sector in 2012–2015.

• CSC Steel’s 1HFY20 net profit of RM2.9mil missed expectations, coming in at only 9% and 12% of our fullyear forecasts and full-year consensus estimates respectively. We believe that the variance against our forecast came largely from lower sales volume of cold rolled coil steel (CRC) due to the movement control order (MCO); and a lower CRC average selling price.

• However, these were partially mitigated by the lower cost of input hot rolled coil steel (HRC). In 1HFY20, international HRC prices averaged at US$533/tonne, 19% lower vs. US$656/tonne a year ago.

• Our earnings downgrade is largely to reflect a softer demand for flat steel as activities in the manufacturing sector (the key consumers of flat steel) were disrupted or came to a complete halt during the first two stages of the MCO from 18 March to 13 May. In addition, we expect soft demand from key downstream consumers such as the infrastructure and construction sectors in the near term.

• 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 local players, these may not completely eliminate the loopholes. With cheap imports still flooding the local market, we believe that the local flat steel producers, CSC included, will have no choice but to defend their market share at the expense of margins.

• Nonetheless, at the current price, we believe that the market has overreacted to the downside. Also, at the current level, we believe that the share price will be very well supported by a dividend yield of 4.7% per annum, which in turn is underpinned by a strong balance sheet with a net cash of RM295.3mil or 80.0 sen/share as at 30 June 2020.

Source: AmInvest Research - 28 Aug 2020