Despite potential share price overhang in the short term due to healthy correction in global steel prices and persistent warrants’ conversion, as well as the FMCO restrictions, values have gradually resurfaced after a 20.6% correction from the 52- week high of RM0.705. HIAPTEK’s risk-reward profile is attractive amid undemanding 8.1x FY7/21 PE (60% lower than 5Y average of 20x) and a strong FY21-23E EPS CAGR of 22%, underpinned by more stable steel prices as supply-demand dynamics appear to be in a much better shape compared to the previous cycles owing to China’s environmental reform policies, stimulus-driven and infrastructure-led economic recovery post-pandemic, coupled with the turnaround of Eastern Steel (on improved cost efficiency and higher selling prices).

Pending for a bullish triangle breakout. After plunging 35% from 52-week high of RM0.705 to YTD low of RM0.455, HIAPTEK has been steadily trending upward to close at RM0.56 yesterday. We are optimistic that the stock will stage a successful breakout above RM0.59 (downtrend line from RM0.705) after a short term consolidation amid ongoing uncertainty. Clearing this hurdle successfully would signal that a new up-leg has begun to retest RM0.615 (14 June high) and our LT target at RM0.705 levels. Key supports are pegged at RM0.54 (uptrend line from RM0.455) and RM0.50. Cut loss at RM0.495.

Appendix
Business segments:
1. Manufacturing: This division undertakes the manufacturing and distribution of steel pipes, hollow sections, scaffolding equipment and accessories, and other steel products. The Group’s diversified steel products and certifications give them a strong competitive advantage to supply to various projects and industries to local and regional markets.

2. Trading: This segment is one of the largest in Malaysia and is involved in the importation and sales of various types of steel products to both hardware companies and project end users in multiple sectors. It combines synergistically with the manufacturing segment to become a one-stop steel solution provider for all major infrastructure and construction projects.

3. Eastern Steel S/B: The Group’s 30%-equity owned JV, ESSB operates a fully integrated steel plant with a 600 m3 blast furnace (BF) and a rated capacity of 700k MT p.a. The billet caster plant, added in Dec 2018, consists of a six-strand billet R8m continuous casting machine and its auxiliary facilities with a rated 1million MT capacity p.a. ESSB had also completed and commissioned its 55 MW power plant in Oct 2019 that helped the company achieve significant savings in energy costs. The BF has seen its performance improve significantly since resuming production in FY19 under the stewardship of Jianlong Group, ranked as the 5th largest producer in China and 8th in the world.

In FY20, a total of 794,268 MT of steel products were sold comprising 70,196 MT of slabs (9%) and 724,072 MT of billets (91%). Domestic sales volume was 231,549 MT (28%) while export sales volume was 562,719 MT (72%). ESSB sells its products in Malaysia, and also exports to neighbouring countries including China, Vietnam, Indonesia, Thailand, Philippines, India, South Korea and Taiwan.

Source: Hong Leong Investment Bank Research - 22 Jun 2021