CSCSTEL: Steel Producer Exceeds Earnings Expectations, Target Price Raised on Strong Cost Control

A leading steel producer has reported core earnings for Fiscal Year 2025 (FY25) of RM71.1 million, notably exceeding full-year forecasts by 104.3%. This strong performance was primarily driven by significant cost efficiencies, including lower input costs, effective material control, and the positive impact of a strengthening Ringgit against the US dollar.

Despite a robust improvement in profitability, the company’s revenue for FY25 saw an 8.8% year-on-year (YoY) decline. This was attributed to weaker average selling prices (ASPs) across steel products amid a global steel price downtrend and lower sales volumes. Nevertheless, core earnings surged by 131.0% YoY, reflecting successful internal cost management strategies.

On a quarter-on-quarter (QoQ) basis, adjusted net profit declined by 10.9%, influenced by a 7.7% reduction in revenue and higher operating costs. Consequently, both core PBT (Profit Before Tax) margin and core net margin decreased by 80 basis points and 20 basis points, respectively, in 3QFY25 compared to 2QFY25.

The company maintains a strong financial position, characterized by no borrowings and a healthy net cash position of RM414.1 million. Demonstrating its commitment to shareholder returns, the group has proposed a first and final dividend of 14.1 sen per share for FY25 (up from 7.0 sen per share in FY24), translating into an attractive dividend yield of 9.4% based on the recent closing price.

Future Outlook and Strategy

Management expresses cautious optimism regarding the global steel market outlook for 2026. This positive sentiment is underpinned by expectations of gradually improving demand and ongoing supply-side adjustments. However, the market continues to face pressure from elevated Chinese exports, although the implementation of export licensing for selected Chinese steel products and stronger trade protection measures in key international markets (such as the US, EU, Mexico, and Canada) are anticipated to enhance market discipline and support a gradual recovery in steel prices.

Domestically, operating conditions are perceived as balanced. While cost pressures from carbon taxation and regulatory-related supply chain adjustments persist, they are partially mitigated by favorable currency movements. Underlying demand for steel products remains robust, supported by steady construction activity and ongoing infrastructure and industrial projects. Regulatory developments, including the Countervailing and Anti-Dumping (Amendment) Act 2025, are also seen as structurally supportive. However, competition has intensified, particularly following a 0% anti-dumping duty ruling on certain Vietnam-based galvanised steel coil producers.

The company’s strategy focuses on enhancing earnings resilience and competitiveness through disciplined and opportunistic approaches, emphasizing cost efficiency, prudent inventory management, and progress on ESG and decarbonisation initiatives. As a downstream steel player, the company is poised to improve margins by concentrating on value-added steel products, a strategy that offers greater pricing power through product differentiation, distinguishing it from upstream producers reliant on commodity price movements.

Valuation and Recommendation

Investment bank TA SECURITIES has maintained its “BUY” recommendation for the stock, raising its target price (TP) to RM1.89 (from RM1.40 previously), representing a 25.8% upside from the last traded price of RM1.50. The revised TP is based on rolling forward the valuation to CY27 and applying a higher target Price-to-Earnings Ratio (PER) of 10x (up from 9x previously).

The higher PER multiple is deemed warranted by the company’s steady earnings performance and attractive dividend yield offerings. TA SECURITIES has maintained its earnings forecasts for FY26-27 and introduced a new FY28 core net earnings forecast of RM72.3 million, representing a growth of 3.8%.