Source: The Edge
For CSC Steel Holdings Bhd, our forecast financial year ending Dec 31, 2020 (FY20F) net profit is cut 13% but our call is upgraded to “buy” from “hold” as value has emerged after the recent steep correction in its share price.
Our FV remains at RM1.09 based on 0.5 times its book value, consistent with its historical average during the last downcycle in the flat steel sector in 2012 to 2015.
The earnings downgrade is largely to reflect a softer demand for flat steel as activities in the manufacturing sector — the key consumer of flat steel — were disrupted or halted completely during the 28-day movement control order, and weaker prices averaging at RM2,500 a tonne, about 9% lower versus RM2,750 a year ago, due to sluggish demand coupled with cheap imports in the market.
These are partially mitigated by a lower cost of input hot-rolled coil (HRC). In the first quarter ending March 31, 2020, international HRC prices averaged at US$560 (RM2,436) a tonne, 22% lower versus US$720 a tonne a year ago.
We remain cautious of the local flat steel sector’s prospects amid the economic slowdown, while competition from cheap imports remains unabated. While the government has put in place safeguard measures to protect local players, these may not completely eliminate loopholes.
With cheap imports still flooding the local market, we believe local flat steel producers including CSC Steel will have to defend their market share at the expense of margins.
Nonetheless, at the current price, we believe the market has overreacted to the downside.
Also, at the current level, we believe CSC Steel’s share price will be very well supported by a dividend yield of 7% per annum, in turn underpinned by a strong balance sheet with a net cash of RM249.4 million or 67.5 sen a share as at Dec 31, 2019.