Stock Name: CSCSTEL
Company Name: CSC STEEL HOLDINGS BERHAD
Research House: AMMB

CSC Steel Holdings Bhd
(Aug 10, RM1.81)
Maintain buy at RM1.78 with a higher fair value of RM2.19: We maintain our buy call on CSC, with a higher fair value of RM2.19, as we raise FY10F-12F EPS by 8% to 11% following the group's stellar 1H10 results. Our higher fair value pegs the stock to its: (1) three-year average PER of 4.6 times, at a 20% discount to its long-term PER; and (2) net cash of 76 sen (43% of current share price).

CSC's 1HFY10 results were above expectations. Its net profit of RM62 million constituted 63% of our previous full-year forecast and 73% of consensus.

2QFY10 earnings grew by a robust 235% year-on-year and 3% quarter-on-quarter as the group rode on improved steel prices and better domestic demand for flat products.

This was evident from its higher average utilisation of 70% in 1HFY10 against 63% last year.

We expect CSC's earnings before interest, tax, depreciation and amortisation (Ebitda) margins to normalise moving into 2HFY10 (1HFY10: 17%). Product orders have slowed near term as CSC's clients adopt a more cautious approach amid current volatility in iron ore prices.

However, impact will be mitigated by CSC's efficient inventory management and preferential hot rolled coil (HRC) prices ' with strong support from parent China Steel Corp (CSC Corp). CSC's Ebit margins averaged at 15% over the last four quarters ' well
above its peers' 9% to 12%.

Chinese HRC prices have rebounded from a trough of US$590 per tonne on July 16 to US$630 per tonne last week. Current CRC-HRC spread is about 25% ' slightly higher than in 2006. Malaysia's flat steel prices typically track Chinese HRC prices, albeit with a one-quarter lag.

With CSC Corp expecting higher HRC prices in 3Q2010, we expect domestic cold-rolled coil (CRC) prices to recover in tandem with renewed regional pricing sentiment in 4Q2010.

CSC is a well-managed company, with further valuation support coming from its: (a) minimum dividend payout policy of 50%; and (b) proactive share buyback policies.

The company offers investors an opportunity to ride the current volatility in the steel sector ' backed by its attractive yields of 8% to 10%.

We project CSC's net profit to surge 18% y-o-y to RM108 million in FY10F, and rising to RM116 million-RM126 million in FY11F-12F.
Group's balance sheet remains strong; it remains debt free with a projected net cash position of RM354 million for FY10F.

CSC trades at an ex-cash FY11F PER of only 5.7 times, a steep 29% discount to its peers.

This is unjustified in our view, given (i) CSC's dominant 40% market share in the local CRC market; (ii) the industry's leading ROEs of 13% to 14%; (iii) CSC's proactive capital management; and (iv) strong backing from parent CSC Corp (one of the world's leading HRC players). ' AmResearch, Aug 10


This article appeared in The Edge Financial Daily, August 11, 2010.