• The largest manufacturer of CRC products in Malaysia. CSCSTEL (listed in Dec 2004) is engaged in the upstream of the steel value chain, manufacturing and marketing of pickled and oiled steel (PO), cold rolled coil (CRC) products, hot dipped galvanised steel (GI steel) and pre painted galvanised steel (PPGI) or colour coated steel. The group operates in the mid-stream of the steel value chain. The stock is a resilient play on the steel sector amid diversified revenue base to buffer fluctuation in the industry in the construction & property, manufacturing & Industrial, automotive and others. Since inception, CSCSTEL was able to ride on the tough operating environment largely unscathed, thanks to its hands-on management, solid balance sheet, sound business structure, product acceptance and operational efficiency coupled with strong backing from its parent, China Steel Corp, Taiwan.

• The company is situated in Ayer Keroh Industrial Estate in Melaka. It has the capacity to produce 40,000 metric tons of P&O, 440,000 metric tons of CRC, 240,000 metric tons of GI and 120,000 metric tons of PPGI steel annually. CSCSTEL’s main raw material, hot rolled steel (HRC), is mainly supplied by its parent company and its related companies in Taiwan and Vietnam. The group’s downstream customers are the steel pipe makers, steel drum makers, roll formers for roof sheet and cladding and steel service centres. In 2016, the capacity utilization rate of the plant is 90% and its main market is in Malaysia with less than 20% of its revenue derived from exports.

• Positive 2017 outlook and a handsome dividend payout to cushion downside. At RM2.06, CSCSTEL is trading at trailing 10x PE. Excluding the 52 sen netcash/share, the underlying business is only valued at 7.4x (on par with closest peer Mycron 7.5x trailing P/E but no dividend), supported by attractive dividend yield of 6.8% (14 sen dividend will go ex on 28 June), which could provide sufficient margin of safety to cushion further sharp downside risks in share price. Management is also positive on overall 2017 outlook given the sustained momentum of its products, falling raw materials prices, steady steel prices coupled with the recovery in RM (vs US$).

• Further uptrend likely. CSCSTEL price has been trending above the support trendline (near RM1.98) and 200-d SMA (near RM1.93) since hitting YTD low of RM1.74 (17 Mar). As long as these supports are not violated, we remain optimistic that share prices could march further towards RM2.10 (61.8% FR) and RM2.18 (76.4% FR) resistances before reaching our LT objective at RM2.32 (52-week high). Cut loss at RM1.92.

Source: Hong Leong Investment Bank Research - 29 May 2017