Highlights

Operating environment remains challenging. Management guided that operating environment of the flat steel product segment (in particularly the cold-rolled product sub-segment) remains challenging, on the back of: (1) The import restriction on hot-rolled coil (HRC, the feedstock), which requires industry players (including CSC Steel) to source at least 50% of its required feedstock locally (which is often priced higher than the international market); (2) Volatile international steel prices (which in turn are driven by excess capacity in the region); and (3) US$ appreciation (CSC Steel is a net US$ payer due to the feedstock importation).

Attempting to partly mitigate the challenges. Management indicated that it is looking at several alternatives to partly mitigate the challenging operating environment in Malaysia, which include:

1. Exploring more export opportunities in Indonesia. This market appeals to CSC Steel due to the growing automotive segment there (which means good demand for cold-rolled products), and the absence of antidumping duties levied on cold-rolled coil producers from Malaysia; and

2. Enhancing its production efficiency by upgrading its production facilities (which will take place by 2014).  We see value in CSC Steel. Despite its bleak earnings outlook, we see value in the company, given its huge cash pile of RM265.8m (70 sen/share as at 30 Jun 2013 or 55% of current price), and more importantly, management’s commitment to pay out decent dividend despite difficult operating environment. In our forecasts, we are projecting a DPS of 7 sen p.a. in 2013-14, translating to dividend yield of 5.5%/year.

3Q13 results preview. We expect the coming 3Q13 results (due out early next month) will likely to weaken further from 2Q13, due mainly to weak demand sentiment (arising from weaker steel prices) and the depreciation of RM against the US$ (resulting in higher feedstock costs). Nevertheless, we view the potential weakness in its share price (due to weak 3Q results) as an opportunity to accumulate, given its decent dividend yield which will improve further if there is price weakness.

Risks

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

Forecasts

2013 net profit forecast cut y 8.1% to RM41.7m, largely to reflect weaker demand in 3Q.

Rating

Trading BUY

Positives – Strong balance sheet

Negatives – Inability to pass on higher cost of raw materials

Valuation

Maintain SOP-derived TP of RM1.50 and T.BUY recommendation on the stock.

Source: Hong Leong Investment Bank Research - 3 Oct 2013