We  revisited  HTVB’s  fundamentals  and  discovered  several  positive drivers that may further lift its bottomline. As its current utilisation rate is  just  50-60%,  any  improvement  in  its  operations  (from  increased production) will directly boost earnings. Eastern Steel SB is a long-term investment,  while  its  Bukit  Besi  iron  ore  mine  remains  a  bonus.  We upgrade HTVB to BUY, with a MYR0.97 FV. 

- A fresh look at its fundamentals. After reporting weak FY12  earnings due to a sluggish operating environment, Hiap Teck Venture (HTVB) has recovered strongly in FY13 with a healthy 47.3% y-o-y earnings growth. We  believe  that HTVB’s operation has stabilised  and  this  is  now  an appropriate time to revisit the group’s fundamentals and potential growth prospects.  

- Positive  drivers.  Some  positive  factors  that  may  propel  HTVB’s earnings include: i) an increase in demand for water pipes, should water pipe replacement projects kick off, ii) the US’ anti-dumping duties against nine  oil  and  gas  pipe-exporting  countries  may  open  a  window  of opportunity for HTVB, iii) its trading arm’s margin is expected to recover, and  iv)  contributions  from  its  55%-owned  Eastern  Steel  SB  upon commencement of commercial production may boost earnings further.

- Sensitivity  analysis  shows  positive  outcome.  With  HTVB’s current utilisation  rate  at  just  50-60%,  the  company  is  already  profitable.  Our sensitivity  analysis  suggests  that  a  10%  increase  in  the  utilisation  rate will  further  improve  its  profitability  by  12.0%  and  9.9%  in  FY14F  and FY15F respectively, due to operating leverage effects.  

- Risks. The steel industry, being extremely competitive, is characterised by volatile prices. The expected increase in water pipe demand may not materialise, with trading margins continue to come under pressure.   

- Upgrade  to  BUY, MYR0.97 FV. We  valued  HTVB  at  0.5x  FY14F  P/BV previously.  In  view  of  its  stable  operations  and  improving  earnings visibility, we raise our valuation to 0.72x FY14F P/BV, which is -0.5 STD  from  the  mean  of  its  5-year  historical  trading  band  (from  -1.0  STD),  to derive  a  new  FV  of  MYR0.97  (from  MYR0.66).  We  also  upgrade  our recommendation on the stock to BUY from Trading Buy.

Source: RHB