Highlights

FY13 results preview. We expect the weak demand sentiment (arising from sideways HRC prices), weak RM against US$, coupled with intense competition among players to continue drag CSC’s 4Q13 performance. Given the challenging operating environment, we believe CSC’s 4Q13 net profit will likely have dipped further (from RM2.9m in 3Q13) to ~RM2m, bringing FY13 net profit to ~RM30m (lower than RM33m we projected earlier).

Generous dividend payout to remain. Nevertheless, we believe dividend payout will likely remain generous (we are projecting a total DPS of 7 sen/share for FY13, translating to payout ratio of ~90% and dividend yield of 5.3%), given the company’s substantial cash balance (of 75.7 sen as at 30 Sep 2013).

Over the near term, we expect the weak earnings trend to continue into 2014, given the intense competition within the local flat steel industry and weak RM (against the US$). While management had previously indicated its intention to diversify its market reach to Indonesia, we believe such intention may not be materialize in the near term, due to the country’s currency plunge, which has in turn weakened demand sentiment.

We are slightly more positive on the company’s longer term prospects, underpinned by its plan to upgrade production facilities (likely take place this year), which we believe will enhance the company’s production efficiency.

Risks

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

Forecasts

FY13-14 net profit forecasts trimmed by 7.7-10.7% to RM29.5m and RM28.6m respectively, to account for lower sales volume and margin assumptions.

Rating

HOLD

Positives – Strong balance sheet

Negatives – Inability to pass on higher cost of raw materials

Valuation

No change in our SOP-derived TP of RM1.38 (7x 2015 EPS and net cash of 76 sen as at 30 Sep 2013), pending results announcement. Maintain HOLD recommendation

Source: Hong Leong Investment Bank Research - 17 Feb 2014