Analysis

Analysis of CSC STEEL HOLDINGS BHD

Dear Readers

CSC Steel Holdings Bhd (“CSC“) announced, on 22 February 2017, that it has approved a 10 cents final dividend and, on top of that, a 4 cents special dividend. This brings the dividend to an aggregate of 14 cents.

Do note that the dividends will go ex on 28 June 2017.

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CSC’s shares has been depressed since the start of the year. It has been hovering around the RM2 mark giving the 14 cent dividend a dividend yield of about 7%. Very high indeed.

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Dividend pay out in itself should not be a sole reason for one to purchase a stock. The company must also be fundamentally strong and has good prospects.

Though I am not too concerned about CSC’s fundamentals (as you will find out later), CSC’s prospect hinges on a couple of externals factors which are beyond its control: the price of steel (or its derivative, iron ore) and the health of the economy. This makes CSC’s stock very cyclical in nature thus it may be an unsuitable candidate for a solid dividend play. In good times, dividend may be bountiful but on the flip side, dividend may be scarce.

Introduction

CSC is a holding company of which its subsidiaries are in the business of producing cold rolled steels, pickled and oiled steels, hot dipped galvanised steel  and pre-painted galvanised steel or colour coated steel.

Cold rolled steel coils have applications in the manufacturing of home appliances, automotive, commercial drums and furniture.

Pickled and oiled steels are used as automotive parts and strapping structural materials.

CSC is also marketing and selling products from galvanised steel and pre-painted galvanised steel as roof truss, roofing, wall cladding,  under the brands RealZinc and RealColor.

A major shareholder of CSC is China Steel Corporation of Taiwan. CSC benefits from the supply of steel, equipment, technology and management from China Steel Corporation of Taiwan.

Abour 80% of its revenue is derived from the local market and the rest, from various markets overseas.

Financials
DATA 2016 2015 2014 2013 2012 2011
REVENUE (RM’000) 1,035,197 1,017,137 1,048,469 1,141,727 1,126,994 1,206,148
PROFIT (RM’000) 68,689 54,602 (21,266) 29,350 28,008 29,551
OPERATING PROFIT (RM’000) 73,730 61,505 (25,739) 30,766 29,906 31,064
SHAREHOLDERS’ EQUITY (RM’000) 808,551 769,251 728,523 776,186 773,098 771,767
DEBT (RM’000) 67,164 60,769 63,186 63,291 74,480 74,517

RATIO

DEBT TO EQUITY 0.08 0.08 0.09 0.08 0.10 0.10
OPERATING PROFIT MARGIN 0.07 0.06 N/A 0.02 0.02 0.02
OCF RATIO 2.24 1.39 -0.02 1.90 1.50 0.07
PROFIT MARGIN 0.06 0.05 N/A 0.02 0.02 0.02
EPS (CENTS) 18.63 14.75 (5.72) 7.89 7.5 7.9
EPS (ADJUSTED) CENTS 18.63 14.37 -5.6 7.64 7.37 7.78
DPS CENTS 14 8 3 7 7 7
DIVIDEND PAY OUT 0.75 0.54 0 0.88 0.93 0.88
P/E 11.54 7.39 0 15.71 15.84 16.79
ROE 8.51 7.00 0 3.80 3.60 3.80

As indicated in the table, top line growth was on a downtrend between FY2011 and FY2016. Despite that, bottom line growth was rising during the same period. This is due to the drop of the production cost as a result of lower raw material cost and an increased of production efficiency. EPS saw a substantial increase from 7.78 cents, in FY2012, to 18 cents, in FY2016.

With the increase in EPS, dividend pay out also increased. In fact, CSC has a policy of distributing 50% of its profit as dividend.

The increase in dividend does not hurt it financially because CSC has zero borrowings. On top of that, CSC is sitting on a mountain of cash reserve of over RM190 million as per its Q1 FY2017 report. Cash flow is also a breeze.

The growth outlook of Malaysia in 2017 is more optimistic than in 2016. First quarter GDP growth stood at 5.6%. This effect has seeped through the steel industry as witnessed by the surge in CSC’s net profit from RM6 million, in Q4 FY2017, to RM16 million in Q1 FY2017. That’s an incredible increase of 166% in net profit.

EPS growth rate is about 18% (as indicated by FT) even though I am of the opinion that EPS  growth rate is not sustainable owing to CSC’s flat top line growth which has been consistent from the past years.

Further, there is limited room in which an efficient production can contribute to an increase in profit margin, EPS or ROE without diminishing returns. Premised on that, I reckon that CSC growth rate would be in the vicinity of 2% based on sustainable/organic growth (without any borrowings).

Notwithstanding that the group strives to achieve cost-cutting measures with a RM26 million capital expenditure, in 2016, on production equipment which will improve the quality of its products and the efficiency of the production line. I hope to see the investment being fruitful for the rest of FY2017.

Conclusion

I like CSC for:

  1. Strong support from its major shareholder, China Steel Corporation of Taiwan. The bond is so strong that China Steel Corporation of Taiwan supplies materials to CSC.
  2. Strong cash reserve and zero borrowings means the group is resilient even when economic conditions are unfavourable.
  3. Dividend pay out policy of at least 50% of profits.
  4. Efficient production and quality products.

CSC is unappealing because:

  1. Cyclical nature of the steel industry (although that could be a positive point depending if you are buying the shares at the top or bottom cycle)
  2. In the mercy of external factors beyond its control such as price of raw materials and dumping schemes.
  3. Lacking growth catalyst (top line earnings have been flat).
  4. Retaining its market share from the onslaught from Chinese steel imports may pose a challenge. In April 2017, the government announced that it is implementing import levies on Chinese steel products to safeguard the Malaysian steel industry. I noticed that this anti-dumping measure does not encompass the steel coil segment but only includes steel concrete reinforcing bar (rebar) and steel wire rods & deformed bar in coils (SWR & DBIC). Given that scenario, CSC would be in a tough position to compete with Chinese steel imports in the near future.

Ultimately, if you are looking at a dividend play, this looking like a solid counter.

Disclosure

I do not own shares in CSC.

References
  1. http://www.thestar.com.my/business/business-news/2015/06/17/csc-steels-revenue-down-8-in-fy14/
  2. http://www.cscmalaysia.com/brandBrochure.asp
  3. http://www.thestar.com.my/business/business-news/2016/10/01/putting-the-steel-back-in-steel-industry/
  4. http://www.theedgemarkets.com/article/definitive-safeguard-duties-imposed-imported-steel-products
  5. https://markets.ft.com/data/equities/tearsheet/summary?s=CSCSTEL:KLS
  6. FY2016 Annual Report
  7. http://www.federalgazette.agc.gov.my/outputp/pub_20170413_P.U.%20(B)%20191.pdf
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