Fair Value : RM0.44 | Recom : Market Perform (Maintained)

Below expactations. 1QFY07/13 net profit came in way below expectations at only 3% of our full-year forecast and the full-year market consensus. We believe the key variances against our forecast came largely from lower-than-expected export sales and selling prices, coupled with higher-than-expected production cost. 1QFY07/13 net profit plunged 88% yoy largely due to lower sales volumes and selling prices, coupled with higher production cost.

Domestic steel pipe demand to remain weak. We expect domestic demand for steel pipes to remain subdued as key water-related projects are unlikely to get off the ground in a major way in the absence of any significant progress being made in relation to the restructuring of the water sector in Selangor. While the RM300m allocation for water pipe replacement announced in Budget 2013 will give the sector a lift, it is not significant to make a major difference to players. No doubt large-scale public infrastructure projects such as the LRT line extension and Klang Valley MRT will stimulate demand for smaller-diameter pipes. However, the demand will only come during later stages of implementation. Adding salt to the wound are cheap imports in the market that weigh down on selling prices and hence margins.

Risks. The risks include: (1) Further decline in global steel consumption, putting more downwards pressure on international steel prices; and (2) Higher input costs.

Forecasts. We are cutting FY07/13-15 net profit forecasts by 38-52%, having reduced EBIT margin assumption for the trading division, as well as selling prices for the manufacturing division.

Investment case. While robust construction activities will boost demand for steel in the local market, steel players are unable to raise prices due the depressed steel prices in the international market on the back of the muted economic outlook in the EU and China, and the still massive steel production overcapacity in China. Local steel players have to competitively price their steel products (i.e. at only a small premium to the international price) to prevent local contractors from importing their steel requirements. Fair value for Hiap Teck is reduced to RM0.44 (from RM0.51 previously) based on 0.35x (from 0.4x previously) book value of RM1.25, at a discount to its historical average during downcycles to reflect the continued weak demand for pipe products. Maintain Market Perform.

Source: RHB Research - 13 Dec 2012