Results Review

• Excluding the extraordinary items totalling RM4.7mn, CSCSTEL’s 9MFY24 core earnings of RM18.1mn came in below our expectations, accounting for only 58.6% of our full-year estimates. The negative variance was mainly due to slower-than-expected recovery in the average selling prices (ASP).

• YoY, 9MFY24 revenue dipped by 1.2%, primarily due to suppressed ASP stemming from intensified competition from low-cost imports and the expiry of anti-dumping duties in Malaysia, which collectively push steel prices downward. Correspondingly, CSCSTEL’s core earnings fell sharply by 54.1%, attributed to rising cost per unit amid decreasing ASP, which eroded profitability margins by 1.8 ppt.

• QoQ, the company's 3QFY24 topline grew by 10.6%, driven by increased sales tonnage compared to the previous quarter. However, core earnings dropped sharply by 41.6%, attributed to the same factors mentioned earlier.

• The balance sheet remains strong, with zero borrowings and a net cash position of RM330mn.

Impact

• Given the weaker-than-expected results, we revised our ASP and sales tonnage assumptions for FY24-26F. As a result, our earnings estimates have been adjusted lower by 23.5%/17.4%/22.1%, respectively.

Outlook

• The group remains cautiously optimistic about its proactive strategies to bolster competitiveness in product pricing and quality. These continuous efforts aim to mitigate pressures from ongoing challenges, such as subdued ASP and overcapacity issues arising from the weakened Chinese steel industry and the sluggish recovery in China’s property sector.

• Meanwhile, interest rate cuts in the US and easing monetary policies in China are expected to support global steel demand and prices by improving overall economic conditions. Domestically, the revitalisation of the construction sector is anticipated to act as a key growth catalyst.

• However, we believe that headwinds will likely persist in the near term, driven by intense competition among steel players and ongoing unfair trade practices. These challenges are further exacerbated by the lack of government support for the local steel industry, particularly in light of the weak recovery in steel prices.

Valuation

• Following the earnings revision, we adjusted our target price to RM1.02 from RM1.20, based on 11x CY25 earnings. However, we maintain Sell recommendation on the stock due to the anticipated negative return.

Source: TA Research - 25 Nov 2024