Fair Value : RM1.66 | Recom : Trading Buy

Outlook softens. CSC guided for more cautious outlook in 2H2012 and 1H2013, on the back of softer local automotive and manufacturing sectors, and export sales.

Room for M&A. CSC said that parent China Steel is still keen to acquire an upstream steelmaker in Malaysia for vertical integration with CSC’s downstream operations. We understand that Malaysian steelmaking businesses have recently become a hot commodity among Chinese and Taiwanese steel players as they could be used by them as a stepping stone into the steel markets in Indonesia and Thailand that are at present dominated by South Korean and Japanese players.

Structural issue persists. There is no change to the current state of play that all local flat product players including CSC will have to source for their HRC inputs from the sole local supplier. Apart from premium pricing to the international spot price, the HRC is also of inconsistent quality, affecting operational efficiency of CSC. On the other hand, taking advantage of the minimal import duties pursuant to the AFTA agreement, foreign players have been flooding the local market with low-priced flat products, eating away market shares of local players including CSC.

Risks. The risks include: (1) The liberalisation of the local CRC market but not the HRC market; and (2) Significant increase in raw material costs.

Earnings Forecasts. FY12/12-14 net profit forecasts are cut by 1-9% largely to reflect lower sales volumes and selling prices.

Maintain Trading Buy. The outlook for flat product players in Malaysia is at best only stable due to the muted growth prospects for the local automotive, manufacturing and export sectors over the short term. However, we see a tactical angle in owning CSC by virtue of the possibility of it being taken private given its huge cash reserve of RM231.7m or 61sen/share as at 31 June 2012. Also lending credence to CSC’s privatisation story is the rumour of CSC’s parent company looking to acquire a stake in Lion Group’s steelmaking business, Megasteel.

Indicative fair value for CSC is RM1.66 based on 0.8x book value of RM2.08, at a premium to its historical average of 0.7x to better reflect its strong balance sheet and possible privatisation by its parent company.

Source: RHB Research - 2 Oct 2012