CSC Steel - a Graham Net Net opportunity?

[i4value]

CSC Steel is one of the largest cold roll mill in Malaysia that is currently trading below its liquidation value. The first step when you come across such a company is to be ask yourself why are you so lucky.

You should dig deeper. This is what I did and my analysis is to be found in Is CSC Steel one of the better Bursa steel stocks?  It is fundamentally sound. 

So it is an investment opportunity? You should check it out yourself.

[weijian]

hi i4value,

I took at quick look at this company. Interesting to see a few things:

- Inventory turnover~30days, receivables turnover~30days and payables~7 days. I think they are paying their suppliers REALLY fast. And it turns out that ~50% of COGS is from their Taiwanese parent. In other words, they are funding 30-7=21days of working capital for their parent.

- It has a pretty decent dividend payout ratio of 50% - understandable since the parent owns 46% of it. But it remains to be seen whether the parent benefits primarily from selling raw materials to CSC Bhd (and collecting the outstanding invoices from them in 1 week) to sell in Msia, or making higher net profit to pay out as dividends.

- But I think the biggest issue would be the fact that raw material prices are in foreign currency (USD) and I suspect raw material cost makes up the bulk of COGS, while revenue is priced in MYR as 90% of sales in Malaysia. Been an exporting country and stuck with low interest rates, having your revenue in MYR + COGS in FX --> strong headwinds.

[i4value]

But all steel companies in Malaysia have the same forex problem so it is a level playing field. It is definitely operating as part of the Taiwanese Group but the returns have been pretty decent.

[weijian]

But all steel companies in Malaysia have the same forex problem so it is a level playing field. It is definitely operating as part of the Taiwanese Group but the returns have been pretty decent.

So my point would be - So what if the leveling field is level within steel companies? We are not constrained like its Taiwanese parent who is doing business in Msia as part of their international expansion. We are minority investors who can do without such "decent" steel companies and look beyond that.

Doing an inversion, would it better to look at companies with "revenue in FX + costs in RM" and change that headwind into a tailwind?

Of course, you probably have plenty of competency looking at steel companies in your past line of work experience.  Although I would argue that familiarity bias is a great opportunity cost. It is something that I myself is also struggling with.

[i4value]

I must declare that I dealt with CSC Steel (then known a Ornasteel) as a supplier when I was running the steel operations years ago. The biggest risk to them is Lion and whether/how they can bring their steel plant back online. When this happens, I suspect it would be on the back on some tariff protection that would disadvantage all the steel plants (in terms of sourcing). But I don't think the economic situation is ripe for this for the next few years. So make hay with the sun shines.

[i4value]

Ternium is a South American steel company. Although it has some mining operations, these serve mainly in-house and are a small component relative to the steel output. It achieved revenue and profit growth through organic growth and acquisitions over the past 11 years.



It has a strong financial position and a good capital allocation plan, creating value for shareholders. A Valuation based on the steel price cycle shows a sufficient margin of safety, making it an investment opportunity.

If you are already invested in Bursa steel companies, this might be a good geographical diversification.

[i4value]

According to Damodaran, projecting the performance of cyclical companies based on the current performance can lead to mis-valuations. He opined that for such companies we should look at the performance over the cycle – the normalized performance.

When I carried out such an analysis of CSC Steel, I found that there is still a margin of safety based on its current price. Refer to page 20 of the article