Results

1H13 reported net profit of RM25.1m (+54.3%), accounted for 55.2% of our full-year forecast. We consider the results within our expectation as we believe performance in the subsequent quarters will remain relatively flattish compared to 2Q given the stiff competition in the region.

Deviations 

-

Dividends

-

Highlights

On a qoq basis, 2Q13 net profit weakened to RM7.5m (from RM17.5m in the previous quarter) mainly on the back of: (1) Lower sales volume; (2) Lower selling prices; and (3) RM9.4m inventory writedown.

1H13 net profit rose by 54.3% to RM25.1m mainly on the back of the strong performance due to sharp recovery in sales volume (whereby earnings registered in 1Q13 itself was already more than the earnings registered in 1H12), but partly mitigated by RM9.4m inventory writedown incurred in 2Q13.

While international steel prices seem to have stabilized, we are holding our cautious view on the company’s mediumterm outlook as overcapacity in the region (in particularly, China, Indian, and Korean steel mills) will continue to weigh on the sector’s profitability including CSC Steel. Despite our less bullish view on the company’s earnings outlook, we believe share price downside is limited by its RM265.8m net cash (translates to 70 sen/share or 54% of share price) in its balance sheet.

Risks

Downside risks-

(1) Overcapacity in China remains over the longer term; (2) Volatile input prices; and (3) Influx of steel products at cheap prices.

Forecasts 

We are maintaining our 2013 earnings forecast, but cut 2014 earnings forecast by 19% to RM43.5m largely to account for lower sales volume assumption.

Rating

Trading BUY

Positives – Strong balance sheet

Negatives – Inability to pass on higher cost of raw materials to end-users

Valuation

SOP-derived TP cut by 6.8% to RM1.50 to reflect the downward adjustment in our 2014 earnings forecast, which more than offset a slightly higher net cash balance. Maintain T.BUY call on the stock.

Source: Hong Leong Investment Bank Research - 5 Aug 2013