This article first appeared in The Edge Financial Daily on August 21, 2018
CSC Steel Holdings Bhd
(Aug 20, RM1.30)
Maintain hold with a lower target price (TP) of RM1.34: CSC Steel Holdings Bhd’s net profit for the first half of its financial year 2018 (1HFY18) of RM21 million came in below expectations, accounting for 36.1% and 41.7% of our and street’s full-year estimates.
The variance was mainly due to higher raw material costs of hot rolled steel and zinc; higher transportation cost; and a drop in sales volume of higher-margin products such as galvanised steel, and pre-painted galvanised steel.
Year-on-year, 1HFY18 net profit declined 32.2% to RM21 million despite a 9.5% increase in revenue to RM690.3 million. The improvement in revenue was mainly contributed by higher selling prices of steel products as well as higher overall sales volume.
Quarter-on-quarter, CSC’s net profit for the second quarter (2QFY18) was 1.8% lower at RM10.4 million as revenue declined by 1.5% to RM342.5 million. The lower net profit was due to marginal increase in overall production cost whereas revenue was dragged down by lower sales volume during the reporting quarter.
Following the weaker-than-expected results, adjustments are made to reflect the higher raw material costs. We have also reduced the utilisation rate for galvanised steel and pre-painted galvanised steel from 75% and 65%, to 70% and 60% respectively. All in, we trim our earnings forecasts for FY18, FY19 and FY20 by 18.3%, 4.9% and 3.2% respectively.
We expect cheap influx of flat steel to continue affecting the group. The local cold rolled coil players are awaiting a final decision from the trade ministry, expected in 2H of 2018, on potentially more stringent measures against flat steel imports. If this happens, it would serve as a positive catalyst for the stock.
Subsequent to the earnings downgrade, we lower the TP from RM1.41 to RM1.34, based on unchanged 8.5 times calendar year 2019 earnings per share. — TA Securities Research, Aug 20