INTER-PACIFIC Research is shifting its call on CSC Steel Holdings Bhd to sell, with a maintained target price of 68 sen, keeping to its price-to-book ratio valuation of 0.3x against CY21 book value of equity per share.
For the first half ended June 30, 2020 (1H20), the company’s revenue and earnings fell below expectations at RM405.6 mil (versus RM674.9 mil in 1H19) and RM2.8 mil (versus RM17.2 mil in 1H19) respectively.
“We attribute the earnings miss to larger-than-expected sales loss, a drop in its average selling price and contraction in manufacturing margin,” Inter-Pacific said in a Sept 1 note.
On a quarterly basis, the company’s 2Q20 revenue fell by 64.7% year-on-year (y-o-y) to RM121.4 mil compared to last year’s RM343.7 mil. Its earnings for 2Q20 also dipped to -RM2.1 mil from 2Q19’s RM12.6 mil.
“This was due to the movement control order (MCO) enforcement towards the ends of 1Q20 that forced the cessation of operations of the local steel sector, coupled with an already weak steel sector, battered by cheap imports,” it said.
Despite the Ministry of International Trade and Industry (MITI) allowing the steel sector to resume operations in mid-April, its plant utilisation fell to 33% in 2Q20 from the previous 80% in 1Q20.
Nevertheless, CSC is targeting to achieve at least 70% utilisation rate for its manufacturing plants in 2H20.
However, Inter-Pacific remains cautious regarding the outlook of the local steel sector as foreign import volumes coming into Malaysia remains relatively high.
“We maintain our view that the local steel sector outlook continues to be bleak, despite various economic data showing signs of a recovery,” it said.
Going forward, as raw material prices see an upward pressure amid recovering economic activity that boosts the demand for steel, coupled with the global supply disruptions on iron ore, management believes that margins may be thinning out.
As of 10.46am today, CSC Steel Holdings Bhd had a 0.60% increase in share price to 84 sen and a market capitalisation of RM317.3 mil.
