This article first appeared in The Edge Financial Daily on February 14, 2018

CSC Steel Holdings Bhd
(Feb 13, RM1.58)
Upgrade from hold to buy with an unchanged fair value of RM1.83: We maintain our forecasts based on 10 times financial year 2018 (FY18) earnings per share, in line with the average forward price-earnings ratio of major global key steel producers. This is because value has emerged after the steep fall in share prices in recent months.

CSC Steel Holdings Bhd’s FY17 core net profit of RM62.3 million (excluding RM2.5 million inventory write-downs) met our forecasts and consensus estimates.

The company’s FY17 turnover increased 28% year-to-year (y-o-y), mainly driven by higher selling prices, partially offset by marginally lower sales volume.

Meanwhile, its FY17 core net profit dropped 10% y-o-y as higher sales were more than offset by a sharp increase in production costs of hot-rolled coils (HRC) and overhead costs, and distribution costs. There was also an increase in exports that commanded thinner margins.

We expect earnings in FY18 will increase by 8.3% as margins normalise. Recall that CSC experienced a margin squeeze in FY17 on the back of rising prices of input HRC. Prices of end-products, cold-rolled coils (CRC), normally lag those of input HRC when HRC prices are on an uptrend. We expect more stable HRC prices in FY18 versus FY17.

We like CSC because it is one of the dominant local CRC players in the market, and it offers a good dividend yield of 6% to 8% per annum. While its earnings prospects are dented by a margin squeeze arising from the sustained uptrend in prices of input HRC, we believe this has largely been priced in by the recent steep fall in its share price. — AmInvestment Bank, Feb 13