Hiap Teck’s  FY14  (FYE July 2014)  earnings  were  within our and streetestimates. We remain positive on its outlook, and keep our BUY call andMYR1.00  FV  (27%  upside)  –  still  pegged  to  0.72x  FY15F  P/BV. Meanwhile,  management  expects  its  blast  furnace  plant  joint  venture (55%-owned  Eastern Steel SB)  to be completed by end-2014, for which we estimate a start-up loss of about MYR15m in FY15F. 

Results  in  line.  Hiap  Teck  reported  FY14  net  profit  of  MYR45.6m (+83%  y-o-y),  within  our  and  consensus  estimates.  As  expected,  its manufacturing  drove the group’s growth, reporting an increase of  6.0% y-o-y in revenue to MYR573.2m and  a  45% growth in pre-tax profit to MYR37.3m. Its trading  division’s revenue dropped by 6% y-o-y  due to intense  competition  in  the  industry.  Nonetheless,  the  overall  pre-tax margin  for  the  group  widened  from  continuous  improvements  in operating efficiency, on top of a  higher  share of profits from  its jointlycontrolled  entity,  Eastern  Steel  SB,  of  which  it  owns  55%.  Shougang International  Singapore  owns  the  remaining  45%.  Please  read  our  24 Sept report titled “Earnings Expected To Be In Line” for more details. 

Operations  remain  healthy.  Although  the  steel  industry  is  currentlyfacing challenges stemming from the  oversupply of steel products, we are  still  positive  that  Hiap  Teck’s  operations  will  stay  healthy  on  the back of continuously improving efficiency in production and prudent cost management.  Note  that  the  company  is  currently  running  at  about  a 50%  utilization rate,  and  it is in the  black.  Hence,  we  believe  there  is further  room  for  its  bottomline  to  grow,  should  the  demand  for  its products increase. 

Expanding  to  blast  furnace  and  mining.  Management  expects  itsblast  furnace  plant  to  be  completed  by  the  end  of  October  or  early November. We  expect Hiap Teck to recognize  start-up losses of about MYR15m  on the blast furnace in FY15. The company has also taken its first step towards iron ore mining by subscribing to a 55% equity interest in Vista Mining SB. We anticipate management to divulge further details on its mining operations in due course.

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

Source: RHB