More Views On CSC Steel

Here's an update on CSC Steel from OSK Research.

• A Bumpy Ride Ahead
  
  With the steel sector’s outlook turning gloomy and the Chinese Government’s recent moves expected to make things worse for the flat steel market, we are revising downwards CSC Steel’s numbers by 47.8% for FY08 and 37% for FY09. Nevertheless, as its share price has halved from its year peak, we think the market has already priced in the potential losses, hence we are only downgrading our call to NEUTRAL. We have toned down our valuation parameters to 5x FY09 EPS, in line with our newly revised steel sector PER, translating to a lower TP of RM0.91.
  
  Hiccups. When annualised, CSC Steel’s 9M figures came in well within our original projection, even surpassing our full-year projection after incorporating a provision of RM30.2m on diminution in value of inventory. The performance is attributed to (i) the peak in average selling prices (ASP) in July ’08 expanded margin in the early part of 3Q but quickly turned into the red after a sharp plunge in ASP, (ii) customers holding back on purchases in anticipation of a further drop in ASP, thus overall sales fell 10.7% q-o-q, and (iii) the utilisation of investment tax allowance and other incentives lower the effective tax rate to 4.1%.
  
  4Q likely in the red. While we had earlier expected a challenging 2H given the traditional summer season correction (refer to our last results review), the sector outlook is now worse than originally projected due to the worsening financial turmoil. Compared with integrated long steel players that need to write down approximately 10% of their inventory value, we suspect CSC Steel may need to provide for 15% to 20% based on a sharper drop on flat steel’s ASP. Thus, the RM30.2m provision in 3Q which translates into 8.9% of the company’s inventory before provision, suggests that there would be more write-downs in the upcoming quarter. As sluggish steel demand suggests the company’s operation will merely break even at best in 4Q, we have revised downwards our FY08 profit estimates by 47.8%, or a potential RM32.9m loss in the next quarter.
  
  Outlook for 2009 murky. We also suspect that the losses could possibly extend into the following quarter if ASP weakens further should global steel giants manage to secure a significant discount for their contracted iron ore. Although spot iron ore, steel scrap, other ASP and its demand rebounded slightly the past few days, the abolishment of export tax for hot rolled coil (HRC) by China’s Government may put further pressure on the company’s product ASP. We have high expectation that the company’s new rolling plant commissioned last year will enhance CSC Steel’s profitability.

Ooh. OSK expects CSC to report losses for the next quarter and as expected, OSK did not comment on CSC larger than normal investment in marketable securities as mentioned in earlier blog posting: Regarding CSC Steel'sCurrent Earnings And Its Investments In Marketable Securities

RHB Research on the other hand was less than optimistic with CSC. It has CSC as underperform with a much lower target price of only 69 sen! OSK TP is at 91 sen!

• ♦ Within expectation. 9MFY12/08 net profit came in at 93.7% of our fullyear forecast. However, we consider this within our expectation as we expect 4Q to weaken significantly on the back of weaker re-stocking activities by steel stockists, who tend to hold back on buying when steel prices are trending down.
  
  ♦ YoY. Despite RM30.2m inventory writedown during 3QFY12/08, 9MFY12/08 net profit still rose 55.9% to RM100.9m thanks to higher CRC price, particularly during 2QFY12/08 that also boosted buying activities.
  
  ♦ QoQ. On a qoq basis, net profit fell 44.8% to RM27.3m mainly due to RM30.2m inventory writedown to reflect a sharp decrease in CSC’s inventory value.
  
  ♦ Future prospect. Looking forward, we expect CSC’s performance to deteriorate over the near term as price outlook for flat steel products in the international market has weakened on the back of global economic slowdown.
  
  ♦ Risks. The risks include: (1) Worse-than-expected dumping activities by steel producers from China in the international market; and (2) Weakerthan- expected steel consumption.
  
  ♦ Forecasts. Unchanged.
  
  ♦ Investment case. Indicative fair value remains unchanged at RM0.69 based on 5x FY12/09 EPS, in line with our benchmark 1-year target forward PER of 5x for the steel sub-sector. Maintain Underperform.