Insider Asia Thursday, 03 December 2009 17:37
Net profit rose to RM38.9 million in the third quarter of 2009 (3Q09), compared to only RM5.7 million and RM9.4 million in 1Q-2Q09, respectively. We expect the company to continue to fare well in the last quarter of the year — but perhaps not as strongly as its performance in 3Q09.
The stock has done quite well in recent months, in line with the economic recovery and improving operating conditions. But we believe there is still room for further gains based on the stock's relatively modest valuations.
CSC's shares are trading at just about 6.9 times our estimated earnings of 20.2 sen per share for 2010. Furthermore, the stock is currently priced well below its book value of RM1.99. That should limit any downside from hereon.
The company is in very good financial shape. CSC is sitting on almost RM240 million net cash. Thus, it should have no problem maintaining the company's 50% gross dividend payout policy for the foreseeable future.
Based on our dividends estimate of 9.7 and 10.1 sen per share in 2009-2010, respectively, shareholders will earn attractive gross yields of 6.9%-7.3% for the two years. That is well above the current average yield for the broader market as well as bank deposit rates.
CSC Steel's earnings results for 3Q09 strengthened considerably from the preceding quarters.
Turnover was sharply higher at RM261.5 million, up 62% from the immediate preceding quarter. It was, however, unsurprisingly lower on a year-on-year (y-o-y) basis given record high steel prices in 3Q08.
The improved turnover in 3Q09 was due to both stronger volume demand as well as selling prices compared to the first six months of the year. User companies restocked their drawndown inventories on actual and expectations of greater demand from government stimulus measures. Rising demand, in turn, drove prices higher.
Sales for cold rolled coils and galvanised steel products accounted for about 54% and 46% of CSC's turnover, respectively.
Operating margin widened substantially to about 23.4% during the period, compared to 17.5% in 3Q08 and 11.5% in 2Q09. This was due, primarily, to the company's lower cost of raw materials compared to selling prices, which were trending higher. Steel prices hit year-high levels in early-August 2009 before giving back some gains.
Pre-tax profit improved to RM53.6 million in 3Q09, up 88.2% y-o-y and well ahead of the RM12.5 million recorded in 2Q09. Note though that earnings in 3Q08 were affected by some RM30 million in stock writeoffs. Excluding this, pre-tax profit was lower y-o-y, but not by much. In short, CSC's recovery from the lows in 4Q08-1Q09 was very rapid and sharp.
CSC's net profit stood at RM38.9 million in 3Q09, the highest level in a year if we were to exclude all extraordinary items. For the first nine months of 2009, net profit totalled RM54 million.
4Q09 earnings may come off slightly from 3Q09
CSC's profitability has rebounded strongly since hitting the bottom during the peak of the global credit and economic crisis. We expect the company to continue to fare well in the last quarter of the year — but perhaps not as strongly as its performance in 3Q09.
Volume demand picked up sharply in the last quarter, boosted by inventory restocking and rising steel prices. There are indications of some tapering off in the current quarter. Customers remain very cautious on carrying too much inventory given the still limited visibility on the economic recovery in 2010.
Additionally, steel prices underwent a correctional phase after rising to their recent peak in early-August 2009. Prices had been trending lower although they appear to have bottomed out towards the later part of October 2009. The weakening in prices has deterred buyers from stocking up further.
Average selling prices in the current quarter are also likely to be slightly lower than that in 3Q09. Thus, margins in 4Q09 may see some pressure on the back of higher cost of stocks, those acquired through 3Q09.
Nevertheless, CSC is still expected to do quite well for the full year, considering the dismal operating conditions in the first half of 2009 (1H09). We estimate net profit of about RM72.1 million in 2009, including some RM7.3 million in recovery of debts provision in 1H09.
Excluding extraordinary items, net profit is estimated at RM64.8 million, well off the RM169 million recorded last year, which was a truly exceptional year, but just about 15% down from the average earnings in 2006-2007.
Profits expected to trend higher in 2010
Whilst operating conditions have strengthened considerably, we view the outlook for 2010 with some caution.
Market analysts remain sharply divided on the sustainability and pace of the global economic recovery, even whether there will be a double-dip W-shaped recession next year.
Demand for steel products was shored up by massive government stimulus spending on infrastructure this year. But that support will gradually come to an end. Global steel consumption remains well below capacity resulting in the risks of short-term over-production — especially if the world economy grows at only modest pace in the next year or two.
Positively, steel prices appear to have bottomed and have begun to inch higher again. For the moment consensus indicates prices would remain in an uptrend in 2010, supported by forecast demand growth and pricier raw materials.
Market observers currently expect prices for the main raw materials for steel making, iron ore and coking coal, to rise under the 2010-2011 supply contracts.
Spot prices for iron ore recently broke above US$100 (RM337) per tonne, compared to this year's contracted price of about US$65-US$70 per tonne. Similarly, spot prices for coking coal are currently trading some 30%-40% higher than 2009-2010's contracted prices.
We forecast CSC's sales to grow by about 10% in 2010 — following a 40% contraction this year — while net profit is estimated at RM75.3 million, up 16% y-o-y excluding extraordinary items.
