We  expect  Hiap  Teck  to  announce  its  FY14  results  on  Friday.  We maintain our BUY call  and  MYR1.00  FV, suggesting a 28% upside. The manufacturing  division  may  be  the  main  contributor  of  the  strong earnings  growth,  while  its  blast  furnace  is  finally  reaching  the completion  stage.  Hiap  Teck  took  a  step  forward into  iron  ore mining through its 55%-owned Vista Mining SB.

Earnings  preview.  Hiap  Teck  is  likely  to  announce  its  FY14  earnings this  Friday  and  we  are  of  the  view  that  the  number  should  come  in largely within our expectations. We expect Hiap Teck to close  FY14 with a decent  earnings  growth of >80% y-o-y.  The main earnings contributor will likely be its manufacturing arm.

Blast furnace  plant coming on  stream.  Its long-awaited blast furnace plant  (Phase  1)  is  finally  coming  to  the  completion  stage.  Hiap  Teck expects  the  plant  to  commence  operations  by  end-October/early November.  Phase  1  blast  furnace  plant  will  likely  have  700,000  slab production capacity. We expect the plant to incur  start-up losses for the first  and  second  quarters  in  FY15,  possibly  break  even  in  the  third quarter  and  report  profit  by  the  fourth  quarter.  We  take  a  more conservative stance and expect the  initial  losses from the blast furnace plant to be around MYR15m (from MYR8m).

Mining asset.  Hiap Teck  has taken its first step towards iron ore mining by subscribing  to  a  55%  equity interest in Vista Mining SB,  a company involved  in  iron  ore  exploration,  mining  and  processing  operations.Management expects the operation (possibly in Bukit Besi,  Terengganu) to start  in early  2015.  At  the  current iron ore price of  about  USD80 per tonne,  we think that  the margin may  not  be  as lucrative,  but would help to sustain  the raw material supply to  its  blast furnace  plant, and possiblyenable  cost savings to improve the plant’s profit margin.  More details on the mining operations should be ironed out in due course.

Earnings  adjustments.  We  keep  our  FY14F  earnings  forecast unchanged but adjust  our FY15F  earnings by  -9%  after incorporating  a larger share of losses from Eastern Steel.  

Maintain  BUY.  We  maintain  our  BUY  recommendation  on  Hiap  Teck with an unchanged FV of MYR1.00, pegged to 0.72x FY15F P/BV, which is +2 SD from its 5-year historical trading mean.

Source: RHB