CSC Steel likely to face lower demand

The spread of the Covid-19 has impacted demand for steel as finished steel product inventories begin to climb and new orders see a pullback


CSC Steel Holdings Bhd’s business outlook remains negative with bearish demand-supply fundamentals, while the weaker crude oil prices may see demand from oil drum makers fall for its flat steel product.

Inter-Pacific Research Sdn Bhd believes local oil producers may hold back on production until prices stabilise and/or recover.

“We maintain our sales forecast for CSC Steel’s financial year 2020, but tweak our earnings down 6.3%, considering strong headwinds such as potentially lower automotive sales that could tighten margins ahead.

“We maintain our view that the outlook for the steel sector continues to be bleak with global manufacturing data continuing to slump,” it said in a recent note.

CSC Steel ended the week at 61 sen for a market capitalisation of RM227 million.

Melaka-based CSC Steel is a manufacturer of flat steel products which are used to make motor vehicles, electrical appliances and other such items.

Inter-Pacific Research has maintained a ‘Sell’ call on CSC Steel with a lower target price of 46 sen (previously 94 sen), as it adjusts their price-to-book value ratio valuation down sharply to 0.2 time (in line with peer average) from 0.4 time due to the persistent underperformance of the steel sector amid the Covid-19 uncertainty and pressure on manufacturing.

Further downside risks include steel inventory glut coupled with muted demand, volatile raw material prices, larger than expected slowdown of the Malaysian economy, lower investor risk appetite and Covid-19 pressures.

Inter-Pacific Research said CSC Steel will be able to counter some of the risk factors through its zero gearing position and dividend policy of distributing at least 50% of earnings that will help support its share price.

Despite the coronavirus outbreak, crude steel production in China picked up year-on-year in the first two months of 2020, according to the National Bureau of Statistics of China.

Consequently, the spread of the Covid-19 has impacted demand for steel as finished steel product inventories begin to climb and new orders see a pullback, thus becoming a double whammy on global steel prices.

“As we expected, cold-rolled coil prices have started to follow suit, declining with hot-rolled coil steel prices amid slowing demand and steel overproduction.

“There are early signs of a pickup in China’s manufacturing activities, but we think demand recovery is likely to take longer due to the widespread effects of the outbreak that will need time to mend, in our view,” it added.

Automotive sales in China plummeted 80% in February as potential buyers steered clear of showrooms. Fear of a similar reel back in automotive sales may trickle into Malaysia.

A Movement Control Order instituted in Malaysia since March 18 and a more cautious consumer spending thereafter will surely drag on automotive sales as spending on large-ticket items may be deferred.

According to Inter-Pacific Research, inaction from the Ministry of International Trade and Industry will further be a drag on the steel industry, putting industry players in a state of limbo.

“With a new government and Cabinet line-up, we see another period of gearing up, adding further delays to the White Paper proposal to address concerns the steel industry was reported to have submitted at end-April 2019,” it added.