• We maintain our BUY call, forecasts and fair value of RM1.09/share for CSC Steel 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 9MFY20 net profit of RM15.6mil came in within our expectations at 75% of our full-year forecasts but beat the market expectations at 87% of full-year consensus estimates.

• CSC Steel’s 9MFY20 net profit dropped 44% YoY mainly due to: (1) a lower sales volume of cold rolled coil steel (CRC) during the movement control order (MCO) period; and (2) a lower CRC average selling price. However, these were partially mitigated by the lower cost of input hot rolled coil steel (HRC). In 9MFY20, international HRC prices averaged at US$531/tonne, which was 16% lower vs. US$629/tonne a year ago.

• However, on a sequential basis, 3QFY20 reversed to a net profit of RM12.7mil (vs. a net loss of RM2.2mil in 2QFY20). The turnaround was driven by the recovery in the demand for flat steel as manufacturing activities nationwide (the key consumers of flat steel) resumed after the easing of the movement restrictions.

• 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 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 over-reacted to the downside. Also, at the current level, we believe that the share price will be well supported by a dividend yield of 4.1% per annum, which in turn is underpinned by a strong balance sheet with a net cash of RM307.6 mil or 83.3 sen/share as at 30Sept 2020.

Source: AmInvest Research - 23 Nov 2020