Hiap Teck Venture (HTVB)'s 1QFY13 results were way below the street's and our estimates,  dragged  down  by  sluggish  demand  for  steel  products,  weak  steel prices,  slow  sales  delivery  and  anti-dumping  duties  imposed  by  the  Australian government.  With  no  immediate  catalyst  to  boost  earnings,  the  next  quarter remains challenging. Therefore, we are slashing HTVB's FY13 and FY14 earnings forecasts  and  valuing  the  company  at  lower  base  parameters.  Downgrade  to SELL, with our FV lowered to RM0.40.

Disappointing  numberss.  HTVB's 1QFY13 results were disappointing, with  its  net profit  of  RM1.0m  making  up  only  5%  of  our  full-year  forecasts  and  3%  of consensus'. This was mainly attributed to sluggish demand for steel products and slow sales delivery during the Hari Raya long holidays. In addition, management claimed that the availability of  cheaper  imported  steel  products  had  adversely  affected  the  domestic  steel  industry. Meanwhile,  the  anti-dumping  duties  imposed  by  the  Australian  government  may  have also dampened export sales.

Next  quarter  to  be  weak  too.  We  expect  the  second  quarter  to  remain  weak  as  the Nov-Jan  period  is  a  seasonally  weaker  quarter,  during  which  business  activities  slow down during the Christmas celebration and pre-Chinese New Year preparations.

Still  waiting  for  blast  furnace  plant,  upstream  venture.  The group's  blast  furnace plant  '  which  is  still  under  construction  '  is  scheduled  to  be  completed  by  end-2013. This  means  that  it  would  be  a  long  wait  before  Hiap  Teck  can  reap  any  positive contributions. Besides, its upstream venture into iron ore mining at Bukit Besi has been stagnant for some time. We suspect that any further progress may only take place after the country's 13th General Election, which should be held no later than April 2013.


Earnings cut. Downgrade to SELL. Due to the poor profit visibility, we are slashing our FY13f/FY14f earnings estimates by 51.4% and 41.1% respectively. Furthermore, we are also lowering HTVB's valuation parameter and now peg it at 0.24x FY13f BV, which is -1.5 SD (previously -1.0SD) from the mean of the stock's 5-year historical trading band. Applying  a  10%  iron  ore  DCF  value,  we  derive  a  new  FV  of  RM0.40,  which  is  >10% lower than the stock's last closing price of RM0.465. Downgrade HTVB to SELL.

Source: OSK