CSCSTEL (FV RM1.33 - NEUTRAL) 1QFY12 Results Review: A Cold Start

CSC Steel got off to a weak start in 1QFY12 as its net profit of RM5.6m fell below our and consensus estimates. This could  have been  due to sluggish demand, a struggling global economy and  the persistent  unfavorable spread between Hot and Cold Rolled Coils. Being cautious on the near term outlook, we are  revising lower our FY12 and FY13 earnings forecasts, as well as our valuation parameters. We derive a new FV of RM1.33 based on 0.64x FY12 BV, and downgrade CSC Steel to a NEUTRAL.

Weak despite returning to the black. Although CSC Steel  returned to the  black in 1QFY12 with net profit of RM5.6m (+>100% q-o-q,  -76.9% y-o-y), its numbers still indicate a very weak start as they were way below our and consensus estimates. The weak results can again be attributed to the continuing sluggishness in steel demand. We had earlier anticipated  a  short term spike in steel prices but it turned  out that the momentum was not that impressive. A quick look  at the international Hot Rolled Coils (HRC) and Cold Rolled Coils (CRC)  prices showed us that the margin between CRCHRC remained slim, and thus continued to erode CSC Steel’s bottomline.

Not so hot in the near term. We believe that CSC Steel will still face challenges in the near term, at least  in the upcoming 2QFY12, as market sentiment remains weak. Domestically, the company is still  experiencing inconsistent  raw materials supply  while globally, the slowdown  in  China’s economic growth and the  protracted  European debt crisis are likely to adversely affect buying sentiment.  Overall, we are cautious on CSC Steel’s performance, which prompts us to revise our FY12 and FY13 earnings forecasts downwards by 14.9% and 9.9% respectively.

Downgrade to NEUTRAL. We had earlier pegged  the counter’s  valuation  based on book value  so  as to better reflect its  financial strength.  However, amidst the  ongoing challenges in the  steel sector and  the feeble global economy, we  are  revising our valuation parameter lower to  a  -0.5 standard deviation of its 5-year PBV trading band (previously at mean), from which we derive a FV of RM1.33 based on 0.64x FY12 BV. Despite the hurdles to earnings, CSC Steel possesses a large cash pile of RM224.4m on its balance sheet, which will allow it to honour its dividend payout mandate of 50%. With that, we are downgrading CSC Steel only to NEUTRAL, and will revisit the counter when the market environment improves.

Source: OSK188