Investment Highlights

• We cut FY18F, FY19F and 20F earnings by 30%, 5% and 5% respectively for CSC Steel Holdings, but maintain our FV of RM1.83 as we roll forward our valuation base year to FY19. Our FV is based on 10x revised FY19F EPS, in line with the average forward PE of major global key steel producers. We maintain our BUY recommendation.

• We came away from a recent visit to CSC feeling cautious on the company’s prospects. The outlook for local cold rolled steel (CRC) product market is unfavourable at present, largely due to the influx of cheap imports since end-2017. We believe the dumping activities have been driven by expanded CRC production capacity upon completion of several new integrated steel mills in the region, coupled with the slight premium pricing of CRC products in Malaysia.

• The local CRC players have been actively engaging Miti to address the dumping woes. The local CRC players initially requested Miti a few months ago to impose five measures which include restricting imports from the dumping countries, introducing import licensing, charging anti-dumping duties retrospectively from the date of the breach, requiring imports to be approved by Mesyuarat Mingguan Besi Keluli (a technical committee to evaluate import duty exemption applications for the raw materials of iron and steel products), and appointing an audit firm to ensure importers to adhere to certain quality standards.

• The CRC players engaged with Miti recently to seek protection in form of safeguard duties on CRC products from certain countries similar to the safeguard duties that were implemented in May 2016. Recall, the safeguard duties imposed were between 3% and 24% for selected countries like China, South Korea and Vietnam for five years till May 2021. Local CRC players are hopeful Miti will impose similar duties to countries like India and Japan, and raise the duties rate to countries like South Korea and Vietnam to further hinder dumping into the country. Based on the past practice, upon receiving the petition from the domestic producer, Miti will initiate a preliminary investigation, and the preliminary determination will be made within 120 days from the date of initiation. If the final determination is affirmative, the government will impose an anti-dumping duty at an appropriate rate.

• We now project CSC’s net profit to decline by 22.9% in FY18F, but see it bouncing back strongly by 40.5% in FY19F.

• CSC’s performance in FY18F will be weighed down mainly by: (1) weaker margins arising from the higher energy cost (electricity & gas) which makes up about 10% of production cost, coupled with a reduced spread as the cost of input HRC normally rises at a faster pace vs. the selling price of end-product CRC during an upcycle in the flat steel product prices, and more so when local CRC prices are capped by the availability of cheap imports in the market; and (2) the absence of export sales to the US (on the back of US tariff on steel imports) which contributed ~10% of its topline in FY17.

• The turnaround in FY19F will be driven by: (1) an improved spread and hence margins, assuming HRC prices stabilise and Miti introduces certain measures to put a stop, or at least reduce dumping activities by foreign players; and (2) CSC’s ability to make up the foregone sales to the US with domestic sales and additional export sales to non-US markets.

• Meanwhile, the company’s plan to acquire certain of YKGI’s assets (i.e. PPE assets) in Klang is still in a negotiation stage and the acquisition cost is yet to be finalized. Based on our checks, the estimated PPE book value is RM85mil. We believe the proposed acquisition is to expand CSC Steel production capacity and this is expected to increase CSC Steel’s earnings by ~RM10mil to RM15mil annually. This proposed acquisition will also add to its product offering like galvalume (GL) and pre-painted galvalume (PPGL) in addition to its existing product lines like pickle & oil (P&O), cold rolled coil (CRC), galvanized steel (GI) and pre-painted galvanized steel (PPGI).

• 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 - 9 Apr 2018