Results

Another disappointing quarter. 1HFY14 performance came in weaker than our expectation, with a reported net loss of RM9.1m vs. our full-year net profit forecast of RM39.1m.

Deviations

Mainly due to weaker-than-expected selling prices.

Dividends

None

Highlights

YTD. 1HFY14 turned into a net loss of RM9.1m from a net profit of RM25.1m mainly on the back of: (1) lower selling prices; (2) RM1.9m inventory write-off; (3) RM1.05m impairment on equity investments; and (4) net finance expense.

QoQ. 2QFY14 net loss widened to RM8.8m (from RM0.4m in the previous quarter) mainly on the back of lower sales volume and net interest expense.

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 RM237.2m (or 62sen as at 30 June 2014), 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

FY14-16 net profit forecasts cut by 82.2%, 20.6% and 6% respectively, to reflect lower selling price assumptions.

Rating

HOLD 

Positives – Strong balance sheet

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

Valuation

SOP-derived TP lowered 13.8% to RM1.12 to reflect: (1) Downward adjustment in our earnings forecasts; and (2) Higher net cash position. Maintain Hold recommendation.

Source: Hong Leong Investment Bank Research - 6 Aug 2014