Journey to Wealth
Hiap Teck Venture - Better Days Ahead
Hiap Teck Venture Bhd's (HTVB) 9MFY12 results came in stronger on both q-o-q and y-o-y basis but the quantum of outperformance is smaller than expected. We are not too concerned about the iron ore concession award delay and remain confident that HTVB may ink the official agreement soon. As the global economy continues to stay uncertain with the steel sector facing strong headwinds, we are compelled to revise HTVB's earnings estimates downward. This gives rise to a slightly lower new FV of RM0.73, which is 0.5x FY13 BV and 10% DCF value from the possible iron ore concession. We maintain our Trading BUY call on HTVB as it may see more potential upside with its vertical expansion plan making good progress, apart from a possible revaluation if the iron ore concession is secured.
A weak quarter again. For 3QFY12, HTVB's net profit came in at RM6.7m, which represents a q-o-q and y-o-y improvement of >100% and 23.1% respectively. This stronger q-o-q performance was mainly attributable to the recovery of sales after the festive seasons in 2QFY12 and an improved gross profit margin. However, HTVB's 3QFY12 numbers were overall below our and consensus estimates, and the 9MFY12 results only met 43.7% of our FY12 full-year earnings forecast. On a y-o-y basis, although both trading and manufacturing divisions have achieved a higher turnover of RM143.0m and RM132.4m respectively, compared to RM119.1m and RM117.4m, this positive performance was offset by the drop in profit margin from 10% for last year to 8% mainly due to the higher cost of production.
Iron ore concession still pending. It has been 6 months since the Menteri Besar of Terengganu announced the award of the iron ore mining concession in Bukit Besi to HTVB at the ground-breaking ceremony for Eastern Steel's blast furnace (BF) plant. Despite the fact that the official letter of award has yet to be issued, we are encouraged by Eastern Steel's ongoing BF plant construction, which fulfills the condition (that the company must set up a plant in Kemaman, Terengganu) imposed by the state government for clinching the iron ore concession,. As such, we are confident that Eastern Steel may still have a good shot at bagging the lucrative mining concession.
Mining rights still a sweetener. HTVB's BF plant is still under construction and we believe that HTVB already has plans to source for iron ore to be fed into its BF plant from external parties. Thus, the unexpected delay in the official award of the iron ore concession is not a cause for concern and is not expected to jeopardize the company's prospects in any way.
Making the right decision to expand during challenging times. HTVB's strategy of moving upstream at this juncture could possibly turn out to be a wise strategy as we understand that it takes time to construct a steel mill and also to overcome the learning curve for steel making. By constructing the BF plant during this challenging period, HTVB could position itself to capture the next upswing for the steel sector and ride on the recovery phase to boost its medium- to long-term earnings.
Revise earnings estimates downward. Although we believe HTVB's prospects remain intact, the overall sector is still facing sluggish demand for steel and continuing downward pressure on steel prices, owing mainly to the weak global economic recovery amid renewed concerns over the debt crisis in the eurozone. This prompted us to revise HTVB's FY12 and FY13 earnings estimates down by 33.6% and 23.8% respectively.
Maintain Trading BUY with revised FV. We continue to like HTVB in view of its limited downside and the potential upside surprises arising from: (i) its BF plant which is slated to commence operations in 2013, (ii) its high chance of securing the iron ore mining concession that will trigger an upward revaluation of the company, (iii) the fact that the steel sector may eventually recover due to its cyclical nature, and (iv) the fact that it is currently trading at a deep discount to its FY12 BV of RM1.28. We maintain our Trading BUY recommendation with a FV of RM0.73, which is derived from 0.5x FY12 BV plus 10% iron ore DCF value-add factor.
Source: OSK
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