CSC Steel faces a challenging quarter and year ahead in view of more challenges in sales and a prolonged narrowing of the CRC-HRC price spread, which is likely to impact profit margin, analysts say. – Reuters photo
KUCHING: CSC Steel Holdings Bhd (CSC Steel) could face challenges in its earnings growth in the fourth quarter of 2018 (4Q18E) and financial year 2019 (FY19E), analysts say.
According to the research arm of Maybank Investment Bank Bhd (Maybank IB Research), this is in view of more challenges in sales and a prolonged narrowing of the cold rolled coil (CRC)-hot rolled coil (HRC) price spread, which is likely to impact profit margin.
“We expect CSC Steel to report a three per cent year on year (y-o-y) decline in FY18E revenue to RM1.3 billion, due to the absence of exports (particularly high margin galvanised iron products) to the US, since the latter imposed import tariffs on all steel products in March 2018,” Maybank IB Research said.
“CSC exported approximately 10 per cent of its total production to the US in 1Q18.”
The research arm continued to expect challenging sales and capped margins in FY19E given that there is intense competition from Japan and India boron imports entering the local market.
“Disappointing profit margins are likely to continue to blunt both its earnings before interest, tax, depreciation and amortisation (EBITDA) and net profit in 4Q18E and FY19E.”
“This is in view of a prolonged narrowing of the price spread between China’s HRC and CRC since 1Q18,which is even below CSC Steel’s estimated conversion price of US$100 per metric tonne (MT).”
Maybank IB Research estimated that the CRC-HRC spread tapered further to US$22 per MT in 4Q18 from US$58 per MT in 3Q18.
This could indicate further profit margin squeeze in 4Q18E as the research arm believed the group’s EBITDA tends to follow the spread trend.
“FY19E net profit may be weaker than expected if the spread stays at this level in FY19.”
On dividends, Maybank IB Research highlighted that CSC Steel has a formal dividend policy of 50 per cent and the group had paid more than that for the past few years.
That said, the research arm estimated a lower dividend per share (DPS) of 4.1 sen for FY18E as compared to its FY17 DPS of 10sen with FY18E core net profit to fall 56 per cent y-o-y (dividend payout ratio (DPR) of 50 per
cent).
“We expect the group would keep more cash for its working capital as all its raw material purchases have to be paid in cash while credit terms are granted to most of its customers.
“We also believe that the group would require funds for its capital expenditure (capex) of estimated RM23 million to revamp its old machinery and equipment to ensure competitiveness.”