We consider HTVB’s 1QFY23 core net loss of -RM23.5m (vs. core net profits of RM21.6m in 4QFY23 and RM71.2m in 1QFY22) within our expectation, as we anticipate performance to improve in subsequent quarters, on the back of improving profitability. We tweak our FY23-25 core net profit forecasts marginally (by 1.4%/-0.7%/-0.7%), as we recalibrated our earnings model following the release of annual report. Maintain TP of RM0.33 (unchanged 7x FY07/24 core EPS of 4.8 sen) and BUY rating on HTVB.

Within expectation; expect better quarters ahead. We consider HTVB’s 1QFY23 core net loss of -RM23.5m (vs. core net profits of RM21.6m in 4QFY23 and RM71.2m in 1QFY22) within our expectation, as we anticipate performance to improve in subsequent quarters, as we believe inputs acquired at high costs are depleted. Core net loss of -RM23.5m during 1QFY23 was arrived after adjusting for (i) RM27.4m inventory write-down, (ii) RM0.8m disposal gain, and (iii) RM1.0m unrealised forex gain.

QoQ/YoY. 1QFY23 performance reversed to a net loss of -RM23.5m (vs. core net profits of RM21.6m in 4QFY22 and RM71.2m in 1QFY22), dragged mainly by lower selling prices and high costs of inventories, which led to losses at both trading and downstream segments, as well as lower contribution from 27.3%-owned unit (Eastern Steel Sdn Bhd).

Outlook. While operating environment remains challenging (arising from weak global economic growth, further escalation of geopolitical conflicts, supply chain disruptions, and further monetary tightening), management is turning slightly more positive on its prospects, given the stabilising political landscape and more focus on the economy (which will spur construction activities, hence boosting domestic demand for steel products), slowing inflation rate, and recent relaxation of China’s lockdown policies.

Forecast. We tweak our FY23-25 core net profit forecasts marginally (by 1.4%/- 0.7%/-0.7%), as we recalibrated our earnings model following the release of annual report. While margin will likely recover from 2QFY23 (when inputs acquired at high costs are depleted), demand will still remain weak due to seasonal factor (as demand for steel products normally slows down during CNY month). We believe a more meaningful improvement in performance will only happen from 2HFY23 onwards.

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 - 16 Dec 2022