CSC Steel -
Price Target: RM1.38
Share Price: RM1.36
3Q13 Weakens Further
9M13 reported net profit of RM28m (+25%) came in below our expectation, accounting for only 67% of our full-year forecast.
Weaker-than-expected sales volumes and profitability.
QoQ. Despite the absence of lumpy inventory writedown (recall, CSC incurred RM9.4m inventory writedown in 2Q13), 3Q13 net profit declined significantly by 61% to RM2.9m mainly due to lower sales volume and selling prices, coupled with higher raw material cost arising from RM depreciation against the US$.
YTD. 9M13 net profit increased by 25% to RM28m mainly on the back of the strong performance due to sharp recovery in sales volume (whereby earnings registered in 1Q13 itself was already more than the earnings registered in 1H12), but partly mitigated by RM9.4m inventory writedown incurred in 2Q13.
We continue to see bleak near-term earnings outlook arising from: (1) The import restriction on hot rolled coil (HRC, the feedstock), which continues to drag domestic flat steel players’ performance; and (2) The oversupply concerns in China, which will continue to weigh on the supply-demand situation in the region (including Malaysia). Despite the bleak near-term earnings outlook, we see value in CSC Steel mainly due to its huge cash pile of RM287.8m (or 75.7 sen/share as at 30 Sep 2013), and more importantly, management’s commitment to pay out decent dividend despite challenging operating environment.
Downside risks- (1) Overcapacity in China remains over the longer term; (2) Volatile input prices; and (3) Influx of steel products at cheap prices.
2013-2015 net profit forecasts cut by 20.9%, 22.5% and 6.2% respectively, largely to account for a slightly lower utilization rate assumption and lower EBIT margin assumption.
Positives – Strong balance sheet
Negatives – Inability to pass on higher cost of raw materials to end-users
Post earnings forecasts reduction, our SOP-derived TP on the stock has been reduced from RM1.50 to RM1.38 (see Figure 3). Downgraded to Hold (from Trading Buy) as valuation is no longer attractive following the recent share price run-up and earnings forecasts downgrade.
Publish date: 11/11/13