CSC Steel Holdings Bhd
(March 2, RM1.03)
Downgrade to sell with a lower target price of 94 sen: CSC Steel Holdings Bhd still faces continued competition from cheap imports, volatile raw material prices, a larger-than-expected slowdown in the economy and a lower investor risk appetite. Countering some of the risks are its zero gearing and a dividend policy of distributing at least 50% of earnings, helping support its share price.

For the financial year ended Dec 31, 2019 (FY19), CSC Steel’s turnover was similar to FY18’s, a marginal difference of -1.4% as higher margin products — pre-painted steel coil (PPGI) and galvanised steel coil (GI) — saw reduced volume sales and lower average selling prices (ASPs).

The company’s net profit expanded to RM35 million from RM22.1 million or 58.5% as better tonnage sales, cold-rolled coil’s (CRC) ASP and the trading segment cushioned shortfalls in PPGI and GI product sales.

Its FY19 revenue was within expectations at 101% of our forecast. CSC Steel’s earnings beat our expectations at 109%. Our earnings forecasts are tweaked up 2% after assuming improved margins, but lowered our sales expectations for FY20. Our forecasts for FY21 are introduced.

CSC Steel’s focus is on higher-margin products PPGI and GI to drive earnings and a more competitive pricing to capture market share. There is no heavy capital expenditure in the pipeline.

The Covid-19 outbreak has disrupted supply and demand for steel, especially in China, being a major producer and consumer of the material. China’s steel production looks to fall amid the outbreak which could see fewer exports to Malaysia — good news for local players plagued by cheap steel imports.

The virus situation in Malaysia looks to be in control, as such we believe demand had yet to be badly affected, but the outlook remains uncertain.

We may see CSC Steel reporting lower revenue sales from falling steel prices in the short term. Meanwhile, an elevated pricing spread between the CRC and hot-rolled coil (HRC) provides a margin cushion for the company.

This may only be temporary as CRC prices start to follow suit, declining with HRC steel prices amid slowing demand. Some support to prices will come from production cuts in China as it experiences supply disruptions from plant shutdowns due to the Covid-19 outbreak. — Inter-Pacific Research, March 2