PublicInvest Research

COLFORM Group Bhd - Sabah Based Steel Products Maker

PublicInvest
Publish date: Thu, 23 Jan 2025, 10:03 AM
PublicInvest
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PUBLIC INVESTMENT BANK BERHAD (20027-W)
9th Floor, Bangunan Public Bank
6, Jalan Sultan Sulaiman, 50000 Kuala Lumpur
T 603 2031 3011 | F 603 2272 3704 | Dealing Line 603 2260 6718

Investment Highlights

  • Strong track record. The Group has a track record of 22 years in the steel industry supplying its products to the construction industry in East Malaysia.
  • Wide range of steel product: The Group offers a wide range of products through its steel manufacturing, processing and trading activities, including roofing sheets, roofing accessories, wall claddings, decorative steel products, roller shutters, purlins and battens, door and window frames and floor decks.
  • JKR-licensed and G7-certified contractor. The Group is licensed and certified to participate in JKR projects, well positioned to capitalise on the government's persistent drive to develop and upgrade infrastructure in Sabah and Sarawak.

Company Background

  • Downstream steel products manufacturer. Colform Group Bhd (Colform) is a steel and building materials specialist, principally involved in the manufacturing, processing and trading of steel products, trading of building materials, and provision of supply and installation services using its steel products including IBS steel framing systems as well as project management services for construction projects. Based on the Group's revenue in FY23, it captured a market share of 6.4% in the downstream steel industry in Sabah and Sarawak.

Industry Landscape

  • Demand driven by construction industry. Between 2021 and 2023, the construction industry in Sabah and Sarawak grew at a CAGR of 6.0%, from RM18.4bn to RM22.0bn. Moving forward, the growth of the construction industry in Sabah and Sarawak will be driven by construction activities for residential, commercial, and industrial properties, as well as public infrastructure such as educational institutions and healthcare facilities. (Source: Smith Zander, from company prospectus)

Valuation

  • We derive a fair value of RM0.45, ascribing a 12x FY25F PER, in-line with the average of its closest peers. We believe the valuation justified, backed by the earnings growth from in-house production of Colour Coated Steel Coils and the positive outlook for the downstream steel industry, which is expected to benefit from the government's persistent drive to develop and upgrade infrastructure in Sabah and Sarawak.

Key Risks

  • Key downside risks, among others, include: i) competition, ii) global steel coil price fluctuation, iii) unfavorable changes in import duty regulations, and iv) reliance on foreign workers as general labour.

Company Overview

  • Steel and building materials specialist. Colform is a steel and building materials specialist, principally involved in the manufacturing, processing and trading of steel products and other building materials. The Group also provide supply and installation services using its steel products including IBS steel framing systems as well as project management services for construction projects.
  • Revenue breakdown. Based on 8MFY24 results, the Group mainly derive its revenue from the manufacturing of downstream steel products and processing of steel coils (55.9%), followed by trading of other downstream steel products and building materials (30.7%), and supply and installation services for construction projects (13.4%).

Future Plans

  • Expansion in Peninsular Malaysia. Colform plans to establish a new factory in Klang, Selangor, to target the RM3.7bn downstream steel market in Peninsular Malaysia, which is five times larger than East Malaysia's market. The factory will cover approximately 50,000 sqft, and the operations are expected to commence by 4Q 2025.
  • In-house production of Colour Coated Steel Coils. Colform intends to install a colour coil coating production line in the Kota Kinabalu factory, reducing reliance on external suppliers and improving cost control and quality.
  • Expansion of storage space in Kota Kinabalu. The Group intend to expand its storage space by constructing a new storage facility on the Kota Kinabalu land, in anticipation of the additional storage space needed for the storage of raw materials and finished products.
  • Investment in ERP System. The Group plan to invest in an ERP system to streamline its business operations and processes.

Competitive Advantage

  • Offer a wide range of steel products. The Group offers a wide range of steel products through its steel manufacturing, processing and trading activities, including roofing sheets, roofing accessories, wall claddings, decorative steel products, roller shutters, purlins and battens, door and window frames and floor decks. The Group also manufacture and supply IBS steel framing systems, comprising IBS floor system, IBS wall systems and IBS roof truss systems to construction projects.
  • Track record of 22 years. The Group has an established history of 22 years in the steel industry supplying its projects to the construction industry in East Malaysia.
  • Experienced and hands-on key senior management team. The Group is led by an experience and technically skilled key senior management team that has accumulated years of industry experience and in-depth knowledge of its business operations.

Key Risks

  • Competition. The downstream steel industry in Sabah and Sarawak is competitive and fragmented due to the large number of industry players. Industry players compete in terms of product pricing, range and quality of product and service offering, ability to deliver on timely manner.
  • Exposure to global steel coil price fluctuations Steel coils is one of the key raw materials used by the Group in the manufacturing of downstream steel products, and the price of hot-dipped galvanised coils in Sabah and Sarawak is driven by global hot-dipped galvanised coil prices.
  • Exposure to unfavorable changes in import duty regulations. The steel industry in Malaysia is subject to the Government’s regulations on the imposition of import duty which is generally levied between 0% and 15% for flat rolled steel products. Should there be any changes in import duty regulations, it may result in an increase in the cost of imported raw materials, which may consequently impact the financial performance of steel industry players.
  • Reliance on foreign workers as general labour. Sabah and Sarawak are dependent on foreign workers as a result of limited supply of local labour for manufacturing related operations, and suspensions and/or quota restriction for the hiring of foreign workers may cause difficulties in employing sufficient labour.

Financials

  • Revenue. Colform's revenue grew at a CAGR of 4.1% from RM85.5m in FY21 to RM92.5m in FY23, primarily driven by higher sales volume from manufacturing of downstream steel products and processing of steel coils segment and the trading of other downstream steel products and building materials segment, however this was partly offset by lower average selling prices of its product, which was driven by lower global steel prices.
  • Profitability. Colform’s profit after tax and minority interest (PATMI) declined at a CAGR of -5.5% from RM13.8m in FY21 to RM12.4m in FY23, mainly due to lower gross profit (GP) margin resulting from higher cost of materials and trading goods. This was primarily attributable to the raw materials purchased at higher prices during FY22, which were carried forward and consumed in FY23, while the products were sold at a lower price during FY23, driven by declining global steel prices.
  • Nevertheless, Colform’s GP margin show sign of improvement to 29.8% in 8MFY24, primarily driven by higher margin for projects to supply and install light weight truss system and roofing sheets for Kompleks Perumahan and Bangunan Pentadbiran Batalion 20, Pasukan Gerakan AM (PGA) in Beluran Sabah, and a new construction project for the replacement of various building facilities at Sekolah Kebangsaan Pulau Mantanani, Kota Belud, Sabah.
  • Gearing. Post IPO, Colform’s gearing ratio would improve from 0.09x to 0.06x.
  • Dividend policy. Colform presently does not have any formal dividend policy.
  • Forecast. Looking ahead, we project Colform to achieved a 2-year net profit CAGR of 32.4%, reaching RM22.3m in FY25F. Our projection is underpinned by an unbilled order book amounting to RM34.6m, earnings growth from the inhouse production of Colour Coasted Steel Coils and the positive outlook for the downstream steel industry

Valuation

  • P/E valuation approach. We derive a fair value of RM0.45, pegging it to a 12x FY25F PER, in-line with the average valuation of its closest peers. We believe the valuation justified, backed by the earnings growth from the in-house production of Colour Coasted Steel Coils and the positive outlook for the downstream steel industry, which is expected to benefit from the government’s persistent drive to develop and upgrade infrastructure in Sabah and Sarawak.

IPO Details

Colform is seeking a listing with an enlarged issued and paid-up share capital of 600,000,000 shares on Bursa Malaysia’s ACE Market. Pursuant to the IPO listing, the Group’s market capitalisation is RM216.0m based on its IPO price of RM0.36.

The IPO allocation, post-IPO share capital of Colform and utilisation of IPO proceeds are shown in the following tables.

Source: PublicInvest Research - 23 Jan 2025

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