We cut our FY18-20F net profit forecasts by 16%, 7% and 7% respectively, reduce our FV by 7% to RM1.21 (from RM1.30 previously), but maintain our HOLD call. Our new FV is based on 8x revised FY19F EPS, at a slight discount to its historical 1-year forward P/E of 9-10x to reflect its weak earnings outlook currently.
CSC’s 1HFY18 net profit came in below expectations at only 45% and 42% of our full-year forecast and the full-year consensus estimates respectively. The variance against our forecast came largely from a more severe-thanexpected erosion in margins.
1HFY18 turnover grew 9% YoY thanks to higher selling prices for all the three key products, i.e cold-rolled coil (CRC), galvanised steel (GI) and pre-painted galvanised steel (PPGI), while sales volumes were mixed with CRC reporting growth but GI and PPGI showing weaker and flat performance respectively. In terms of sales value, CRC made up 43% of total, followed by GI (35%), PPGI (20%) and scraps (2%).
However, 1HFY18 net profit plunged by almost a third from a year ago on the back of higher costs of inputs (i.e. hotrolled coil [HRC] and zinc) and transportation, coupled with the change in product mix skewing away from the high-margin GI and PPGI. With cheap imports flooding the local market, we believe CSC chose to defend its market share at the expense of margins. It substantially absorbed the higher costs.
We remain cautious on the prospects of the local flat steel producers amidst steep competition from cheap imports in the market. Pending further anti-dumping investigation, and subject to the outcome, the imposition of more safeguard measures by the Ministry of International Trade and Industry (Miti), the local flat steel players will continue to face margin compression as they are unable to adequately raise prices to pass on the higher production cost including input HRC, transportation and electricity.
Source: AmInvest Research - 20 Aug 2018