KUCHING: Local steel pipe maker Choo Bee Metal Industries Bhd (Choo Bee) still anticipates flat sales for its financial year 2012/2013 (FY12/13) period despite this being partially mitigated by a pick up in orders from East Malaysia, particularly Sabah.
According to an analyst from RHB Research Institute Sdn Bhd (RHB Research) Joshua Ng in a report, Choo Bee echoed its view that domestic steel pipe demand was generally unlikely to pick up anytime soon as key water-related projects were still on hold, pending the restructuring of the water sector in the Klang Valley that had not made much progress over the last few years.
“Additionally, the RM300 million allocation for water pipe replacement in Budget 2013 is not big enough to make an impact to the industry,” opined the research analyst.
“Cheap imports are still flooding the local market, hurting prices, as well as margins and market shares of local steel pipe players including Choo Bee.
“We understand that the group’s overall capacity utilisation rate has remained subdued at 45 per cent, vis-a-vis 70 to 75 per cent during the previous upcycle in 2008-2009.”
On a brighter note, Ng noted that the group’s demand for construction-related products in East Malaysia – namely long steel products such as re-bars, beams and angle bars, structural hallow sections and water pipes – seemed to be picking up.
“Choo Bee said that water pipes in particular have seen a significant pick-up in sales thanks to the on-going water pipe network extension project to cover more rural areas as well as pipe replacement in urban/sub-urban areas in Sabah,” he revealed.
“This is further backed by the recently announced RM988 million allocation (the biggest ever in Sabah, we understand) to upgrade public utilities including water supply, sewage and electrification.
“As such, we project the East Malaysian market to contribute 30 per cent to 35 per cent to Choo Bee’s total sales in FY12/13,” he anticipated.
Meanwhile, the RHB Research analyst outlined the group’s attainment of the API PSL2 certification (the minimum standard required by Petroliam Nasional Bhd (Petronas) for pipe products). In the meantime, Choo Bee was selling its API-certified PLS1 steel pipes to local palm oil producers (such as Felda) as well as in the region.
“While the PLS2 certification will open doors to Petronas as well as other oil majors, we are mindful that the domestic and export markets for API-certified pipes out there are highly competitive and crowded with many big foreign players,” Ng forewarned.
“In short, the PLS2 certification per se will not be a game-changer to pipe players in Malaysia, including Choo Bee.”
Looking ahead, the research analyst painted a weak outlook for the local steel pipe sector as demand for pipes (predominantly smaller-diameter ones) from large-scale public infrastructure projects such as the LRT line extension and Sg Buloh – Kajang (SBK) MRT Line would only increase during latter stages of project implementation.
This was on the back of cheap imports still flooding the local market and API pipe exports being plagued by various issues such as stiff competition from international players as well as anti-dumping investigation.
“We value Choo Bee at RM1.30 per share, based on 0.35 times tangible book value of RM3.74, a discount to its historical average of 0.45 times during downcycles to reflect the continued weak outlook for the domestic steel pipe market,” he said.
“On a brighter note, despite the weak earnings prospects, Choo Bee has committed to its annual dividend payout of six sen per share, translating to a decent dividend yield of 4.65 per cent.”