Investment Highlights

• We upgrade CSC Steel from HOLD to BUY, while maintaining our forecast and FV of RM1.83 based on 10x FY18F EPS, in line with the average forward PE of major global key steel producers. This is because value has emerged after the steep fall in share price in recent months.

• CSC Steel's FY17 core net profit of RM62.3mil (excluding RM2.5mil inventory write-down) met our forecast and consensus estimates.

• The company’s FY17 turnover increased 28% YoY mainly driven by higher selling prices, partially offset by marginally lower sales volume.

• Meanwhile, its FY17 core net profit dropped 10% YoY as higher sales were more than offset by a sharp increase in production costs (HRC and overhead costs) and distribution cost. There was also an increase in exports that command thinner margins.

• We forecast earnings in FY18 to increase by 8.3% as margins normalise. Recall that CSC experienced margin squeeze in FY17 on the back of rising prices of input HRC. Prices of end-product cold rolled coils (CRC) normally lag those of input HRC when HRC prices are on an uptrend. We expect more stable HRC prices in FY18 vs. FY17.

• 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% per annum. While its earnings prospects are dented by margin squeeze arising from the sustained uptrend in prices of input HRC, we believe this has largely been priced in by the recent steep fall in the share price.

Source: AmInvest Research - 13 Feb 2018