Hiap Teck Venture (HTVB) made a strong come back in 3QFY13  with a net  profit  of  MYR9.1m  (+>100%  q-o-q),  exceeding  our  and  street estimates.  The  company  has  yet  to  book  in  earnings  from  its  blast furnace  plant,  which  it  expects  to  complete  by  end-2013.  We  have revised  our  earnings  model  following  the  internal  reallocation  of coverage  resources.  Maintain Trading BUY,  with  our  new  MYR0.66  FV derived from a 0.5x FY14F P/E.

- Strong  comeback  in  3Q.  HTVB  reported  3QFY13  net  profit  of MYR9.1m  (+>100%  q-o-q,  -27.2%  y-o-y),  a  strong  comeback  after having  posted  sluggish  net  earnings  of  MYR1.7m  in  the  preceding quarter.  Its  EBITDA  margin  improved  by  3.4%-pts  q-o-q  despite  the flattish  revenue  sequentially,  mainly  attributed  to  lower  production  cost on more effective controls and higher production efficiency.

- Blast furnace plant yet to generate earnings.  As the  company  targets to complete  its blast furnace plant by end-2013,  it has yet to realize any contribution  from  this  segment.  Nonetheless,  we  believe  that  once  the plant  starts  operation,  it  should  contribute  positively  to  the  Group’s bottomline.

- Change of analyst and valuation method. Due to our internal resource reallocation,  there  had been  a switch  in  the  analyst  covering  HTVB as well as a change in our valuation methodology on the stock. We are now valuing HTVB using  a  P/B multiple, given that  earnings growth may not be too significant before its blast furnace plant is completed. Therefore, we  believe  that  the  P/B  valuation  method should  be  more reflective  of the company’s true value. 

- Maintain  Trading  BUY,  FV  revised  up.  Based  on  our  new  valuation methodology  that  pegs  HTVB  to  0.5x  FY14F  P/B,  we  revise  our  FV upwards  to  MYR0.66,  which  still  offers  investors  a  potential  upside  of 26%. Nonetheless, as the business of steel counters is cyclical in nature, with volatile earnings, we maintain our Trading BUY recommendation on HTVB.

Source: RHB