We anticipate the weak performance to persist into 1HFY23, on the back of high input costs and lower steel prices, and depressed demand sentiment (amidst weak steel price trend and steel construction activities). We maintain our FY23- 25 earnings forecasts, TP of RM0.24 (based on unchanged 7x CY2023 core EPS of 3.5 sen) and HOLD rating on HTVB. While we like HTVB for its favourable longer term prospects (supported by ESSB’s major expansion plan) and healthy balance sheet (with net gearing of 0.36x as at 31 Jul 2022), near-term earnings headwinds will likely cap further upside to HTVB.

More details on ESSB’s 4QFY22 performance. Adjusted for RM100m reversal of impairment and RM25m write-down of inventories, ESSB’s (Eastern Steel Sdn Bhd, a 27.3%-owned JV) earnings contribution to HTVB increased to RM8.3m in 4QFY22 (from RM3.4m a quarter ago) mainly on higher steel prices.

Anticipate weak performance in 1HFY23. HTVB’s earnings will likely worsen in 1QFY23, due to (i) high key input costs and lower steel prices, hence resulting in sharp deterioration in profitability, and (ii) depressed demand sentiment amidst weak steel price trend and steel construction activities. Moving into 2QFY23, while margin will likely recover (when inputs acquired at high costs are depleted), demand will remain weak in 2QFY23 on seasonal factor. Beyond 1HFY23, prospects hinge on China’s zero-Covid policy and implementation of stimulus packages.

No cost savings from coke oven plant in the near term. Phase 1B of ESSB’s coke oven plant has been completed since Aug-22 (which has doubled ESSB’s coke oven capacity to 400,000 tpa). However, we understand that only 3 out of 4 coke ovens are being run currently, as the narrow price spread between coking coal and coke persisted. While management remains optimistic on the longer term economic viability of its coke oven plant investment, it is unlikely for ESSB to realise cost savings from its coke oven plant investment. This is as the sale of coking-quality coals to thermal end users (arising from elevated thermal coal prices), coupled with the onset of La Nina phenomenon in Australia will likely to limit supply of coking coal.

ESSB’s major expansion to go ahead amidst tough operating environment. Despite the highly volatile operating environment, management shared that ESSB is going ahead with its major expansion plan (which is targeted for completion by end- 2023.

Capex. Management shared that capex in FY23 will track FY22’s amount (~RM22m), which will mainly be incurred at expanding its product range at its manufacturing segment.

Forecast. Maintain. We believe the challenging operating environment is adequately reflected by the recent downward revision in our earnings forecasts.

Maintain HOLD with unchanged TP of RM0.24. We maintain our HOLD rating on HTVB, with an unchanged TP of RM0.24 based on unchanged 7x CY2023 core EPS of 3.5 sen. While we like HTVB for its favourable longer term prospects (supported by ESSB’s major expansion plan) and healthy balance sheet (with net gearing of 0.36x as at 31 Jul 2022), near-term earnings headwinds will likely cap further upside to HTVB.

Source: Hong Leong Investment Bank Research - 7 Oct 2022