Investment Highlights

• We cut our FY17-19F net profit forecasts for CSC Steel Holdings by 14%, 15% and 12% respectively, reduce our FV by 15% to RM1.83 from RM2.14, and downgrade our recommendation to HOLD from BUY.

• Our FV is based on 10x revised FY18F EPS, in line with the average forward PE of major global key steel producers.

• CSC Steel’s 9MFY17 net profit came in below expectation at only 63% and 66% of our full-year forecast and full-year consensus estimates respectively.

• We believe the variance against our forecast came largely from worse-than-expected margin squeeze arising from the recent uptrend in prices of input hot rolled coils (HRC).

• Prices of end-product cold rolled coils (CRC) normally rise at a slower pace vs. HRC when HRC prices are on an uptrend, resulting in margin squeeze for CRC producers. We expect the margin squeeze to persist for a while as we expect HRC prices to continue climbing over the medium term, in line with the uptrend in steel product prices in the international market.

• 9MFY17 turnover increased 28% YoY largely due to higher selling prices and volumes. However, net profit declined 28% as higher sales were more than offset by the sharper increase in production cost.

• We like CSC Steel because it is one of the dominant local CRC players in the market and it offers good dividend yield of 6-8% p. a. However, its earnings prospects are dented by margin squeeze arising from the sustained uptrend in prices of input HRC.

Source: AmInvest Research - 27 Nov 2017