Results Review

• Stripping off the one-off reversal of inventories written down amounting to RM3.6mn, CSCSTEL’s 1HFY24 results were disappointing. The company reported core net earnings of RM16.0mn (-59.2% YoY), which accounted for only 30.8% of our full-year estimates. The key variance from our forecast was largely due to lower-than-expected average selling price (ASP) and sales volume.
• YoY, 1HFY24 revenue was relatively flat, decreasing by 1.9%. This was due to the subdued ASP resulting from escalating competition due to low priced imports and the expiration of anti-dumping duties in Malaysia, which put downward pressure on overall steel prices. Consequently, CSCSTEL’s PBT declined by 47.4%.
• QoQ, CSCSTEL’s 2QFY24 top line and PBT decreased by 7.9% and 18.8%, respectively, driven by the same factors, as well as continued softened customer demand affecting sales volume.
• The balance sheet remains strong, with zero borrowings and a net cash position of RM336.4mn.

Impact

• Following the disappointing earnings, we have lowered our assumptions for utilisation rates and ASPs. Consequently, our FY24-26F earnings forecasts have been reduced by 40.6%/30.4%/23.4%, respectively.

Outlook

• The outlook for CSCSTEL remains uncertain amidst challenging conditions in the steel market. The prolonged slump in China’s real estate sector, reduced infrastructure spending, and heightened trade tensions have depressed global steel prices. Additionally, increased competition from low-cost imports, particularly from Vietnam, has further pressured domestic prices.
• Despite the challenges, we remain cautiously optimistic about potential improvements. The Ministry of Investment, Trade and Industry (Miti) is in the process of reviewing the Countervailing and Anti-Dumping Duties Act 1993, with the revised legislation expected to be presented in parliament by January 2025. By implementing stricter trade remedies, this initiative is anticipated to protect specific industries and provide support to smallmedium enterprises against the impact of unfair trade practices,particularly in response to the surge of low-cost imports from countries like China,
• Furthermore, the rollout of more large-scale infrastructure projects starting next year should alleviate ASP pressure and improve sales volume in the steel industry. The demand for steel products is also expected to remain resilient due to the revitalisation of the domestic property sector, driven by new housing project launches and increased construction activities.

Valuation

• Following the earnings revision, we adjusted our target price to RM1.20,Based on 11x CY25 Earnings. Considering the Negative Risk-reward Profile, We Downgraded the Stock to Sell.

Source: TA Research - 26 Aug 2024