Choo Bee sees strong 1H on high steel prices

Posted on 13 March 2017

Source: The Edge

Choo Bee Metal Industries Bhd, which reported a big rise in net profit for the year ended Dec 31, 2016 (FY16) on the back of high steel prices, expects its financial performance to remain strong in the first half of FY17 (1HFY17).

“We expect favourable returns for 1HFY17 and consistent output trend in terms of profit,” said chief financial officer Mark Tan, expressing confidence that the high prices will hold in 1HFY17.

“However, we believe that the current high prices have reached their ceiling and room for increment would be rather limited, with some moderation expected by the end of the second quarter FY17,” he added in a phone interview with The Edge Financial Daily.

The Ipoh-based flat steel products manufacturer saw a 316.75% jump in net profit to RM24.71 million for FY16 from RM5.93 million in the previous year.

Revenue, however, was down 19.86% to RM369.63 million from RM461.21 million due to slower market demand for its manufacturing arm and tepid market conditions for its trading segment.

The manufacturing segment contributed 35% of Choo Bee’s revenue while the trading segment contributed 65%.

Tan said the current price rally is primarily driven by China, which controls global selling prices on heightened construction activity, which in turn boosts demand for steel products.

Incorporated in April 1971, Choo Bee manufactures steel products mainly for oil and gas application, building and construction industries, trading of hardware products and other building materials as well as provision of steel servicing.

Some 95% of its sales are within the country and its only export market at present is Singapore. The group is however looking into re-entering the US, Australian and Middle Eastern markets.

But with the current economic uncertainty and the post-Trump factor, Choo Bee is cautious about entering new markets.

“We have plans, but it’s too early to evaluate the current expansion plans as it is not conducive enough for major expansion plans. We are not embarking on anything just yet,” Tan said.

Within the country, Tan said, demand for steel products and building materials would be driven primarily by the steady implementation of private construction projects as well as governmental infrastructure projects under the 11th Malaysia Plan.

“The government’s efforts to stabilise the supply and pricing equilibrium of steel products via trade measures will continue to play a crucial role in ensuring a level playing field for local steel players,” he said.

Meanwhile, as steel and coal prices in China have been surging, Beijing is cutting down on steel mills and production to reduce excess products and capacity in order to improve steel prices.

China, being the main steel producer, is currently producing about 800 million tonnes per annum and is aiming to produce only 200 million tonnes annually by 2020, noted Tan.

“When there’s higher demand in China, then there’ll be an increase in steel prices, which will then affect the world’s [steel prices], including Malaysia,” he added.

Going forward, with the closure of local raw material supplier Megasteel Sdn Bhd, Choo Bee will be focused on building a healthy and competitively priced supply of imported raw materials.

Tan said the impact of Megasteel’s closure on the group is positive as it is now importing 100% of its raw materials at a cheaper price.

However, due to the weaker ringgit, Choo Bee has to be very careful to mitigate its raw material costs as they are traded in US dollars, said Tan.

“We have also managed to obtain import duty exemption, which is subject to yearly approval from the Malaysian Investment Development Authority for certain classes of raw materials and this translates into better profit margins,” he added.

Choo Bee’s share price closed three sen lower at RM1.82 last Friday, giving it a market capitalisation of RM198.3 million. It is currently trading at a trailing 12-month price-earnings ratio of about eight times. 

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