Choo Bee Metal Industries Bhd
(Nov 7, RM1.69)
Maintain “add” with a target price (TP) of RM 1.85: We visited Choo Bee recently and the key updates are: i) Tasek plant and Pengkalan plant consolidation is complete and now centralised at Pengkalan; ii) phase 2 expansion of the Kapar factory is due to be completed by end of next year; and iii) demand remains dampened with oversupply from China.
The consolidation of manufacturing operations at the Pengkalan plant is now complete. The Tasek plant ceased operations in December last year. At the same time, expansion work for phase 2 in Kapar is in progress and is due for completion by the end of this year.
Steel-dumping activities from China continue to cap potential recovery in steel prices and limit the competitiveness of the local industry players. Despite the duty on imports of steel wire rods, Chinese steel products are still selling at RM200 to RM300 per tonne, cheaper than local market prices.
Choo Bee indirectly benefits from orders by stockists and vendors from government contracts and infrastructure projects. The management expects about 30% of revenue to come from water pipe replacements.
We cut our earnings estimates by 1% to 5% on the back of moderating demand for steel globally and the persistent oversupply from China. We maintain our “add” call on Choo Bee with a lower TP of RM1.85 based on a 2015 estimate price-earnings ratio (PER) multiple of 10 times.
We continue to believe that demand for steel will be affected by volatility of foreign exchange (forex), regional competition and pricing competitiveness among steel players.
Nevertheless, we expect the commencement of new construction and infrastructure projects such as the West Coast Expressway and Program Perumahan Rakyat by the government to generate positive demand for steel products. — Affin Hwang Capital, Nov 7
This article first appeared in The Edge Financial Daily, on November 10, 2014.