Stock Name: CSCSTEL
Company Name: CSC STEEL HOLDINGS BERHAD
Research House: OSK
CSC Steel Holdings Bhd
(June 23, RM1.90)
Downgrade to neutral at RM1.91with a reduced target price of RM2.02 (from RM2.22): We expected CSC Steel to post higher revenue in its upcoming 2Q results as we had foreseen good sales from steel traders who were stocking up on anticipation of higher steel prices. While prices of cold rolled coil (CRC) had indeed moved up from November 2009 to May 2010, bolstered by higher sales in April and May, management has indicated that sales slowed in June. Looking at the potential 2Q results, although there were higher sales in April and May, we think the effect of the better numbers in these two months may have been dampened by the accelerated drop in commodity prices in June. Furthermore, as hot rolled coil prices tend to lag the selling price of finished goods, including CRC, galvanised iron (GI) and pre-painted GI (PPGI) by one month, this may give rise to a mismatch of lower revenue and higher production costs, thus narrowing its profit for 2Q.
We believe the move to lift the annual benchmark pricing system on iron ore may have curbed steel demand as most traders are adopting a 'wait and see' attitude, especially when steel product prices are not rising as fast as iron ore prices, unlike the usual phenomenon where traders stock up on steel products ahead of any changes in iron ore prices. Apart from that, the lower steel demand is further dampened by the European debt crisis and fiscal tightening in China. Thus, with expectations of steel prices being capped in the coming months since the market is not ready for selling prices that are too high, the 'mismatch' between high material costs and lower average selling prices may erode CSC's margins in 2H2010.
With the recent developments reflecting our earlier concerns on 2H, we are prompted to reduce our estimates on CSC Steel by 19.5% and 20.6% for FY10 and FY11 respectively. We downgrade the stock from buy to neutral at a reduced target price of RM2.02 from RM2.22 previously. This valuation is based on six times PER rolled over to FY11 EPS and our projected cash position of 81 sen per share. ' OSK Research Sdn Bhd, June 23
This article appeared in The Edge Financial Daily, June 24, 2010.
Company Name: CSC STEEL HOLDINGS BERHAD
Research House: OSK
CSC Steel Holdings Bhd
(June 23, RM1.90)
Downgrade to neutral at RM1.91with a reduced target price of RM2.02 (from RM2.22): We expected CSC Steel to post higher revenue in its upcoming 2Q results as we had foreseen good sales from steel traders who were stocking up on anticipation of higher steel prices. While prices of cold rolled coil (CRC) had indeed moved up from November 2009 to May 2010, bolstered by higher sales in April and May, management has indicated that sales slowed in June. Looking at the potential 2Q results, although there were higher sales in April and May, we think the effect of the better numbers in these two months may have been dampened by the accelerated drop in commodity prices in June. Furthermore, as hot rolled coil prices tend to lag the selling price of finished goods, including CRC, galvanised iron (GI) and pre-painted GI (PPGI) by one month, this may give rise to a mismatch of lower revenue and higher production costs, thus narrowing its profit for 2Q.
We believe the move to lift the annual benchmark pricing system on iron ore may have curbed steel demand as most traders are adopting a 'wait and see' attitude, especially when steel product prices are not rising as fast as iron ore prices, unlike the usual phenomenon where traders stock up on steel products ahead of any changes in iron ore prices. Apart from that, the lower steel demand is further dampened by the European debt crisis and fiscal tightening in China. Thus, with expectations of steel prices being capped in the coming months since the market is not ready for selling prices that are too high, the 'mismatch' between high material costs and lower average selling prices may erode CSC's margins in 2H2010.
With the recent developments reflecting our earlier concerns on 2H, we are prompted to reduce our estimates on CSC Steel by 19.5% and 20.6% for FY10 and FY11 respectively. We downgrade the stock from buy to neutral at a reduced target price of RM2.02 from RM2.22 previously. This valuation is based on six times PER rolled over to FY11 EPS and our projected cash position of 81 sen per share. ' OSK Research Sdn Bhd, June 23
This article appeared in The Edge Financial Daily, June 24, 2010.
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