Choo Bee’s share price up 50% over past one year

by **Cals** Wed 07 May 2014, 22:54

Business & Markets 2014

Written by Affin Investment Bank

Wednesday, 07 May 2014 10:23

Choo Bee Metal Industries Bhd
(May 6, RM1.96)
Downgrade to add with target price of RM2.05: Over the past one year, Choo Bee’s share price has risen by more than 50%, consistent with our positive view on the stock. However, in the last two weeks, the share price spiked reaching a high of RM2.50.

This, we believe, was mainly driven by improved sentiments following an anticipated water restructuring exercise in Selangor, in light of the shortage of water supply in the Klang Valley.

At the current price level, Choo Bee is trading at 9.6 times calendar year 2015 price-earnings ratio (PER), above its five-year average PER of 8.9 times, but just slightly below the local steel industry average PER of 10 times.

A potential 100,000km of water pipes are up for replacement. Within Peninsular Malaysia alone, nearly 45,000km of pipes need to be replaced in the near term. While the potential for pipe replacement in Malaysia is huge and imminent given the high non-water revenue (2010: 36.4%), Choo Bee will not be the immediate beneficiary as the group does not manufacture large-diameter ductile pipes or mild steel pipes. Choo Bee’s pipes are mainly for general applications, with a maximum diameter of 400mm.

Choo Bee’s manufacturing business only contributes about 35% of the group’s total revenue while 65% of its revenue is derived from its trading business, mainly involving construction steel materials. We expect local construction sector growth to remain buoyant, growing at 4.1% year-on-year, from 3.7% in 2013.

As such, we have raised our trading growth assumption to 10% (from 5% previously) for 2014E and 2016E. In 2012 and 2013, the segment registered a growth of 10.5% and 15% respectively.

We have raised our 2014E to 2016E earnings per share assumptions by 6.6% to 8% on the back of higher demand growth for its trading business. Given the earnings upgrade, we have also raised our target price to RM2.05 (from RM1.77 previously), as we roll over our valuation horizon to 2015, but still ascribing a 10 times PER, which is based on the local steel industry average.

Given the minimal upside, we downgrade Choo Bee to “add” (from “buy” previously). Risks to our recommendation include a significant dip in selling prices as well as a prolonged oversupply of steel products. — Affin Investment Bank, May 6

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This article first appeared in The Edge Financial Daily, on May 7, 2014.[/color][/size]