We expect HTVB to register weaker performance (both QoQ and YoY) in its upcoming 1QFY23 results, due to (i) mismatch between prices of key inputs and steel products, which will in turn result in further margin erosion at its 27.3%-owned Eastern Steel, and (ii) depressed demand sentiment amidst weak steel price trend and steel construction activities, which will in turn affect performance at its trading and manufacturing division. Looking beyond 1HFY23, several indicators are signalling that the steel sector may soon be out of the woods. Hence we are maintaining our earnings forecasts, TP of RM0.33 and BUY rating on HTVB. At RM0.29, HTVB is trading at undemanding P/B of 0.4x (which is at 0.5x standard deviation below its historical 5-year average P/B of 0.5x).

1QFY23 results preview. We expect HTVB to register weaker performance (both QoQ and YoY) in its upcoming 1QFY23 results (due out on 15 Dec 2022) on the back of:

(i) Mismatch between prices of key inputs and steel products, which will in turn result in further margin erosion at its 27.3%-owned unit (Eastern Steel Sdn Bhd); and (ii) Depressed demand sentiment amidst weak steel price trend and steel construction activities, which will in turn affect performance at its trading and manufacturing divisions.

Moving into 2QFY23… While margin will likely recover from 1QFY23 (when inputs acquired at high costs are depleted), demand will remain weak in 2QFY23 on seasonal factor (as demand for steel products normally slows down during CNY month).

Outlook. There are several indicators which signal that the steel sector may soon be out of the woods. These include (i) easing of Covid tracking rules in China, which indicates the Chinese government’s intention to move towards reopening the economy and adds more certainty to the implementation of its previously announced stimulus plan; and (ii) announcement of government support package (which include, amongst others, requiring banks to roll over their loans to the property sector, providing builders with more time to complete unfinished projects, etc.), which is aimed at reviving the property sector in China. Besides, there are talks that Chinese authorities may further soften their stance on property policies in the upcoming Central Economic Work Conference.

Forecast. Maintain for now, pending release of 1QFY23 results. In any case, we believe our FY23 forecast has adequately reflected the weak 1HFY23 results.

Maintain BUY with unchanged TP of RM0.33. We maintain our BUY rating on HTVB, with an unchanged TP of RM0.33 based on unchanged 7x FY07/24 core EPS of 4.8 sen. At RM0.29, HTVB is trading at undemanding P/B of 0.4x (which is at -0.5 SD below its historical 5-year average P/B of 0.5x).

Source: Hong Leong Investment Bank Research - 12 Dec 2022