CSCStel's net profit soared

Background

CSC Steel Holdings Berhad ('CSCStel') is involved in the manufacturing and marketing steel products. Products include hot rolled pickled and coiled steel, cold rolled steel, hot-dipped galvanised steel (GI steel) and pre-painted galvanised steel (PPGI steel or colour coated steel).

CSCStel may benefit from the recent liberalization in the steel sector. This was highlighted earlier by Malaysian-Finance. To wit:

"[CSCStel] also may see a bigger market now because local buyers of secondary flat steel products who had previously enjoyed a 40% duty exemption on their [cold-rolled coils ('CRC')] requirements may now prefer to buy from local producers as imported CRC will be taxed at 25% from Aug 1, ‘09."

Recent Financial results

CSCStel's net profit increased by 312% q-o-q or 42% y-o-y to RM39 million. Turnover was up 62% q-o-q due to higher sales volume but was lower by 33% y-o-y due to lower selling prices. CSCStel's net profit for QE30/9/2009 was higher than QE30/9/2008 due to the absence of the write-down of inventories to net realizable value amounted to RM30 million made in QE30/9/2008.


Table: CSCStel's last 8 quarterly results

Valuation

CSCStel (trading at RM1.38 as at 9.30am this morning) has a PE multiple of 43.1 times (based the last 4 quarters' EPS of 3.2 sen). However, if one were to exclude the impact of the inventory write-down in QE31/12/2008 & factor in the additional demand due to the new duty regime for CRC, then the appropriate EPS to use for calculating the stock's PE is by annualizing the EPS for QE30/9/2009. This will give you an annualized EPS of 41.6 sen. To be on the safe side, let's discount this EPS by 40%- giving us an EPS of 25.0 sen. Based on this EPS, CSCStel's PE multiple is about 5.5 times. At this multiple, CSCStel is deemed attractive.

Technical Outlook

CSCStel in a long-term downtrend which stretches back to early 2005. That downtrend line would cap any rally at RM1.55-58. In addition, an immediate downtrend line that stratches back to mid-2007 can also be drawn. The latter downtrend line would pose some resistance at RM1.42-45.


Chart: CSCStel's daily chart as at Nov 13, 2009 (Source: Tradesignum.com)

Conclusion

Based on the improved financial performance, CSCStel could be a good stock for long-term investment. However, the technical outlook has yet to turn bullish. As such, you can accumulate this stock slowly.