Results

FY13 reported net profit of RM29.1m came in within our expectation, accounted for 98.6% of our forecast.

Deviations 

None

Dividends

Recommended total NDPS of 7 sen (consisting 5 sen final and 2 sen special), in line with our expectation.

Highlights 

QoQ. Although revenue increasing by 10% to RM283.1m, 4Q13 net profit weakened to RM1.1m (from RM2.9m in the previous quarter) mainly on the back of margin erosion arising from lower selling prices.

YTD. FY13 net profit increased by 3.7% from RM28m to RM29.1m, mainly on the back of a sharp recovery in sales volume, which in turn boosted CSC’s 1Q13 results significantly.

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 RM260m (or 68 sen as at 31 Dec 2013), and more importantly, management’s commitment to pay out decent dividend despite challenging operating environment.

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

Maintain. As we believe our earnings forecasts have reflected the weak near-term earnings prospects.

Rating

HOLD

Positives – Strong balance sheet

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

Valuation

SOP-derived TP reduced from RM1.38 to RM1.30 (see Figure 3) as we updated CSC’s latest net cash position. Maintain Hold recommendation.

Source: Hong Leong Investment Bank Research - 24 Feb 2014