July 16, 2010

CSCSTEL - CSC Steel riding through volatility on back of the dividend giant

Stock Name: CSCSTEL
Company Name: CSC STEEL HOLDINGS BERHAD
Research House: RHB

CSC Steel Holdings Bhd
(July 15, RM1.65)
Initiating coverage with buy call at RM1.60; fair value of RM1.96
: We initiate coverage of CSC Steel Holdings (CSC) with a buy on fair value of RM1.96 ' pegging FY2011F BV/share at 15% premium to CSC's long-term average P/B of 0.7 times. This factors in: (i) potential deployment of CSC's excess cash to help fund parent, CSC Corp's expansion plans in Vietnam; and (ii) its strategic positioning within Malaysia's cold rolled coil (CRC) supply chain. its current net cash consists of 48% of current price.

From record average earnings before interest, tax, depreciation and amortisation (Ebitda) margins of 20% over the past three quarters, we expect margins to normalise as CSC draws down on lower-priced inventories secured last year. But, we foresee margins remaining decent at 12% to 13% ' above the industry average of 10% ' thanks to better sales mix of higher-end products and preferential hot rolled coil (HRC) input pricing from its parent.

We project CSC to post moderate earnings growth at 6% to 9% in FY2010-12F as the group benefits from record property sales in 4Q2009 and Malaysia's best automotive season (FY2010F total industry volume in-house forecast to grow 6% year-on-year). In line with a recovering economic outlook, we project average mill utilisation rate at 68% in FY2010F (FY2009: 63%), rising further to 69% to 74% in FY2011-12F.

Admittedly, there are near-term concerns over the volatility of iron ore prices which are widely expected to rise around 30% from July quarter contracts. Another issue would be lingering fears of excess Chinese inventory coming into the Asean market.

These transitory instabilities should be ridden out via: (i) restocking of Shanghai inventories from 4-month low levels; (ii) abolishment of China's export rebates; (iii) no capacity expansion under Chinese regulations until 2011; and (iv) a recent indication by major HRC producers to pass down increasing costs. We gather that prices of the group's CSC products are stickier downwards and that they fare better in a stable input price environment.

We observe that since 1Q2009, the widening of HRC-CRC spread was at a 4-year high, staying above 25%. Average spread was 45% 1Q2010, before easing to 34% in 2Q2010. We believe CRC premiums in the range of 25% to 30% will provide downstream flat players with margin breathers.

As CSC's products are negotiated on a monthly basis, this allows for better cost and inventory management. On our estimates, every RM100/tonne increase in CRC prices would lift the group's FY2010F-11F earnings by 11% to 13%. But prospects for additional capacity kickers for CSC appear remote, with no major capex programmes in the near term. Instead, parent CSC Corp is expanding its regional footprint via Vietnam instead of Malaysia.

Just based on the group's minimum payout of 50%, we project CSC's FY2010F-12F yields to be an attractive 8.2% to 9.5%. With no major capex plans, FY2011F net cash is expected to swell to RM1.11 per share providing more room for capital management upside. Despite enjoying a strong run-up in its share price, CSC trades at an ex-cash PER of only three times with further valuation support coming from its proactive share buyback policies. ' AmResearch, July 15


This article appeared in The Edge Financial Daily, July 15, 2010.




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