CSC STEEL HOLDINGS BHD
By MaybankIB Research Rating: Buy Target price: RM2.02
THE prospects of CSC’s product sales are bright, thanks to the recent recovery in China’s steel prices that could encourage manufacturers to lock in purchases ahead of any further increases in prices.
On that note, MaybankIB Research expects CSC’s margins to be higher sequentially in the third quarter ended Sept 30, 2017, supported by lower raw material costs procured in the preceding quarter.
The brokerage reiterates its “buy” call on CSC, with an unchanged target price of RM2.02 based on a valuation of 10.5 times 2018 earnings.
According to MaybankIB Research, despite lower production volume in the second quarter of 2017, extending into July and August, as CSC’s customers and local manufacturers held back their purchases in anticipation of better prices, the group’s sales are expected to have picked up last month.
“This trend will likely continue into the fourth quarter, for the recovery in China’s steel prices since May 2017 onwards has encouraged companies to lock in purchases sooner rather than later. We believe production last month will be higher than the monthly average of between 33,000 and 35,000 tonnes and it should be sufficient to offset the shortfall in the previous two months,” MaybankIB said.
CSC’s management had slightly raised the average selling prices (ASPs) for its products last month. The rise could be due to China’s relatively higher domestic cold rolled coil (CRC) spot average prices of US$693 (RM2,941) per tonne in August, compared to US$625 per tonne in July. There is the possibility of further hikes in its ASPs across the board in the fourth quarter following higher steel prices, up 3.2% month-on-month to an average US$715 per tonne last month.
MaybankIB expects slight improvement in CSC’s third-quarter gross profit margin as the Group is expected to have incurred lower costs for its main raw material, hot rolled coil (HRC) for the production of all products in the third quarter. This is based on China’s HRC average prices that had been trading lower at US$473 per tonne in the second quarter compared with US$544 per tonne in the prior quarter. HRC accounts for more than 80% of CSC’s cost of goods sold.