CSC Steel Holdings - Still Challenging Despite an Improvement

CSC Steel’s 1HFY12 net income of RM16.2m was slightly weaker than both our and consensus expectations. The result was slightly better mainly attributed to higher sales volume but with could have been better if not for lower ASPs. We are hopeful that the proposals tabled by the Boston Consulting Group will effectively restructure the steel industry and benefit local players. However, investors should stay cautious as the flat steel price does not seem promising. We maintain our earnings forecasts at this juncture but may make necessary revisions in the near term with downward bias. We also maintain our NEUTRAL call and FV at RM1.16.

An improvement, but still soft. CSC Steel posted a net profit of RM10.7m in 2QFY12 (+92.3% q-o-q, +67.9% y-o-y), which was slightly below both our and consensus estimates in annualized term. Despite an improvement on a quarterly basis, its 1HFY12 net profit still lags, compared to the same period last year, by 46.6% (1HFY12: RM16.2m vs 1HFY11: RM30.4m). Nevertheless, we are delighted to see such improvements on both its top- and bottom-line despite the challenging operating environment. The increase in revenue and net income were mainly due to the increase in the sales volume of its steel products, albeit at lower average selling prices (ASPs).

New hope from BCG. The Ministry of International Trade and Industry Malaysia (MITI) has appointed the Boston Consulting Group (BCG) to study and restructure the local steel industry to benefit local players but the details are yet to be revealed. We are certainly hopeful that the proposals tabled by the consultants will restructure the industry so that local steel companies, especially downstream players such as CSC Steel, will benefit and their profits will be back on track soon.

CRC margin narrowing again? Gauging from the East Asia Import CRC-HRC prices, we find that the CRC premium is trending downwards and that may have a negative impact on CSC Steel’s margin in 2HFY12. On top of that, the company is still facing prolonged inconsistency in raw materials supply and that might possibly erode its bottom-line further. Having said that, we prefer to maintain our forecasts at this juncture but may make necessary revisions in near term.

Maintain NEUTRAL. Against the backdrop of the global economic slowdown and the weakening of steel demand resulting from renewed concerns over the European debt crisis, we think that CSC Steel may still be operating in a challenging environment. As such, we are maintaining our NEUTRAL recommendation and FV of RM1.16, derived from 0.56x FY12 BV, as well as -1.0 SD of its five-year historical trading range.

Source: OSK