This article first appeared in The Edge Financial Daily, on December 31, 2015.

Choo Bee Metal Industries Bhd
(Dec 30, RM1.47)
Downgrade to sell with a lower target price (TP) of 97 sen: China’s soft economic growth has further exacerbated the global oversupply of steel products. It has led to dumping activities, resulting in the downtrend of global steel prices.

In turn, this has led to stiff price competition among the local steel producers. Given the persistent oversupply conditions, we expect the average selling prices to remain soft at current levels or even weaker in the first half of 2016.

We have lowered our financial year 2015 (FY15) to FY17 earnings per share (EPS) forecast by 34% to 43% after factoring in: i) a 4% to 8% cut in our average-selling-price assumptions; ii) a softer trading growth forecast of 3% to 5% from 7% to 8% previously; and iii) a softer earnings before interest and tax margin for its trading business given the competitive environment.

However, these are partially mitigated by a lower cost assumption by 8% to 17%.  

Given the cut in earnings, in view of the global oversupply, and stiff price competition, we downgrade Choo Bee to “sell” (from “hold” previously).

Our TP has been lowered to 97 sen (based on an unchanged 10 times calender year 2016 EPS).  

For now, the management aspires to maintain the annual six sen dividend payout for 2015. At the current share price, it will translate into a decent yield of 4%.

Risks to our recommendation includes a significant pickup in the trading business buoyant by the construction and property sectors. However, we believe margins will be capped by price competition, due to persistent global oversupply. — Affin Hwang Capital, Dec 30