Investment Highlights

• We cut our FY18-20F earnings by 2%, 11% and 10% respectively, reduce our FV by 29% to RM1.30 (from RM 1.83 previously) and downgrade our call from BUY to HOLD.

• Our FV is based on 8x revised FY19F EPS (from 10x previously), in line with average PE multiples during the transitional period between mid and trough cycles during May 2008 – May 2009, and January 2019 – present.

• The downgrade in PE multiple is to reflect the less promising prospects of the cold rolled coil (CRC) segment on persistent dumping by foreign players in the domestic market (pending a decision, if any, by the Ministry of International Trade and Industry (Miti) to impose safeguard duties to protect local CRC players), coupled with rising operating cost.

• CSC’s 1QFY18 net profit came in at 22% of our full-year forecast. However, we consider the results below our expectations as we expect weaker quarters ahead against a backdrop of a less rosy industry outlook as mentioned. As against market expectations, CSC disappointed outright, with 1QFY18 number coming in at only 16% of full-year consensus estimates.

• 1QFY18 turnover grew 12% YoY on higher ASP coupled with a marginal increase in sales volume. However, 1QFY18 net profit plunged 36% YoY on the back of higher input (i.e. hot rolled coil) and transportation costs, coupled with lower ASP and hence margins realised at the export segment.

• The prospects of CRC players will weaken further if: (1) Miti holds back from imposing any safeguard measure to protect local CRC players against dumping activities by producers from India, Japan, South Korea and Vietnam; and (2) the cost of input (i.e. HRC) continues to increase at a faster pace vs. the selling prices of end-product CRC, resulting in margin squeeze.

Source: AmInvest Research - 1 Jun 2018