Results

9M13 reported net profit of RM28m (+25%) came in below our expectation, accounting for only 67% of our full-year forecast.

Deviations

Weaker-than-expected sales volumes and profitability.

Dividends

None

Highlights

QoQ. Despite the absence of lumpy inventory writedown (recall, CSC incurred RM9.4m inventory writedown in 2Q13), 3Q13 net profit declined significantly by 61% to RM2.9m mainly due to lower sales volume and selling prices, coupled with higher raw material cost arising from RM depreciation against the US$.

YTD. 9M13 net profit increased by 25% to RM28m 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.

We continue to see bleak near-term earnings outlook arising from: (1) The import restriction on hot rolled coil (HRC, the feedstock), which continues to drag domestic flat steel players’ performance; and (2) The oversupply concerns in China, which will continue to weigh on the supply-demand situation in the region (including Malaysia). Despite the bleak near-term earnings outlook, we see value in CSC Steel mainly due to its huge cash pile of RM287.8m (or 75.7 sen/share as at 30 Sep 2013), and more importantly, management’s commitment to pay out decent dividend despite challenging operating environment.

Risk

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

2013-2015 net profit forecasts cut by 20.9%, 22.5% and 6.2% respectively, largely to account for a slightly lower utilization rate assumption and lower EBIT margin assumption.

Rating

HOLD

Positives – Strong balance sheet

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

Valuation

Post earnings forecasts reduction, our SOP-derived TP on the stock has been reduced from RM1.50 to RM1.38 (see Figure 3). Downgraded to Hold (from Trading Buy) as valuation is no longer attractive following the recent share price run-up and earnings forecasts downgrade.

Source: Hong Leong Investment Bank Research- 11 Nov 2013