Results

• Another disappointing quarter. 9MFY14 performance came in weaker than our expectation, with a reported net loss of RM12.3m vs. our full-year net profit forecast of RM5.1m.

Deviations

• Mainly due to weaker-than-expected selling prices.

Highlights

YoY. 3QFY14 revenue decreased by 1.2% to RM254.4m and turned into a net loss of RM 3.1m from a net profit of RM2.9m, a staggering declining of 206.4%. This is due to lower selling prices.

QoQ. 3QFY14 net loss narrowed to RM3.1m (from RM8.8m in the previous quarter) mainly on the back of lower raw material costs.

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 domesti c 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 still see value in CSC Steel mainly due to its huge cash pile of RM214.5m (or 58 sen as at 30 September 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

• We belief that 4QFY14 looks bleak , thus , we have cut our FY14 forecast to a net loss of RM15.2m. For FY15, we have slashed our earnings by 2.2% and for FY16, we cut by 17.5%.

Rating

HOLD

Positives

• Strong balance sheet

Negatives

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

Valuation

• SOP-derived TP lowered by 5.1% to RM1.06 to reflect the roll forward of our base year from FY14 to FY15 (for valuation purpose) and lower earnings forecasts. Maintain HOLD recommendation.

Source: Hong Leong Investment Bank Research - 24 Nov 2014