CSCSTEL: Earnings Outperform on Strong Margins, Investment Bank Raises Target Price

Core earnings for the first nine months of fiscal year 2025 (9MFY25) significantly outperformed expectations, driven by robust margin expansion. This strong financial performance has led TA Securities to raise its target price for the stock and reiterate a “BUY” recommendation.

Performance Review

The company’s 9MFY25 core earnings of RM45.0 million exceeded TA Securities’ full-year projections by a remarkable 89.0%. This strong beat was primarily attributed to a substantial 350 basis point year-on-year (YoY) expansion in pre-tax profit (PBT) margin. The margin uplift reflects sustained operational efficiencies, tighter cost controls, optimized raw material utilization, and improved procurement effectiveness.

Despite a 10.1% YoY contraction in revenue due to weaker average selling prices (ASPs) across steel products amid a global downtrend, profitability was significantly bolstered by lower input costs, effective material cost control measures, and a strengthening Ringgit against the US Dollar. These factors collectively led to a 148.7% increase in core earnings.

On a quarter-on-quarter (QoQ) basis, adjusted net profit improved by 36.3% despite a slight revenue decline of 1.6%. Core PBT margin expanded by 160 basis points in 3QFY25 versus 2QFY25, with core net margin improving by 140 basis points. This was further aided by a lower effective tax rate of 21.8% in 3QFY25 (compared to 22.1% in 2QFY25) and stronger operating leverage. The company’s balance sheet remains robust, with no borrowings and a net cash position of RM417.5 million.

Future Outlook and Investment Bank’s View

In light of the recent strength in the Ringgit against the US Dollar and management’s ongoing efforts in cost optimization, TA Securities has revised down its cost of raw materials assumptions by 2% for FY25-27F. Incorporating these lower cost assumptions, the investment bank has lifted its earnings forecasts for FY25, FY26, and FY27 by 34.8%, 34.0%, and 47.6% respectively.

Management maintains a cautiously optimistic outlook for the steel sector, citing improving global dynamics, stabilizing steel prices, and China’s production rationalization efforts. Domestically, sustained government commitments to infrastructure development and industrial decarbonization, as outlined in the 2026 National Budget and the Steel Industry Roadmap 2035, are expected to partially offset structural cost pressures. These pressures include an impending carbon tax, continued rationalization of energy subsidies, and higher electricity tariffs. Policy support, such as amendments to the Anti-Dumping and Countervailing Duties Act, further strengthens protection against unfair import competition.

Despite these positive aspects, TA Securities maintains a cautious stance on the near-term outlook, acknowledging fragile global steel fundamentals, ongoing oversupply risks, muted Chinese demand, broader macroeconomic uncertainties, and intensifying regional competition, which could weigh on profitability margins in the interim.

Following the earnings revision, TA Securities has raised its target price upward to RM1.40 (from RM1.23 previously) based on an unchanged PER of 9x CY26 earnings. The investment bank maintains a BUY recommendation on the stock.