We  downgrade  Hiap  Teck  to  NEUTRAL  with  a  MYR0.54  TP  (4% downside)  after  cutting  our  earnings  estimates  by  75.4%/33.2%/13.2% for the next three years. Our TP reflects a FY16 (Jul) P/BV of 0.4x (-1SD). While  we  expect  its  pipe-making  and  trading  businesses  to  generate satisfactory  net  income,  earnings  could  be  weighed  down  by  start-up and unrealised forex losses from its 55%-owned Eastern Steel SB.   

A dismal 2QFY15. Hiap Teck Venture’s (Hiap Teck) long-awaited blast furnace  (BF)  (Phase  1)  under  55%-owned  Eastern  Steel  SB  was  finally commissioned  last  month.  However,  we  expect  Eastern  Steel  to  book start-up  costs  –  incurred on the back of the BF’s cost  advantage  over electric arc furnaces, which are swiftly diminishing as scrap prices have plunged 26% in just over four months to USD250/tonne. In contrast, the price  of  iron  ore  fell  by  just  USD10/tonne  over  the  same  period. Moreover, the sharp plunge in the value of the ringgit over the reporting period may lead to this unit contributing to a huge unrealised forex loss – as the advance provided by its Chinese partner was in USD terms.  

Organic growth for existing units. Separately, the series of revamps in which  Hiap  Teck  moved away  from  American  Petroleum  Institute  (API)-specification  pipes  to  refocus  on  regular  small-  to  large-diameter  pipes has  led  to  improved  numbers  from  its  manufacturing  unit  over  the  past two  years.  While  we  do  not  expect  any  major  surge  in  pipe  demand  in the  domestic  market  –  especially  since  the  water  deal  in  Selangor  has come to another impasse – we expect this unit to grow organically by 5% in  FY15.  Furthermore,  various  mega-projects  implemented  by  the Government may also help spur the growth of its trading division.   

Now NEUTRAL, with a MYR0.54 TP (from MYR0.72). We expect Hiap Teck to record a net loss in its 2QFY15 results scheduled to be released next  week.  The  loss  from  its  JV  company  (estimated  at  MYR15m-20m) could  be  much  larger  than  the  slight  earnings  growth  from  its  existing operations.  As  we  expect  extended  start-up  losses  from  Eastern  Steel SB,  we  cut  our  earnings  estimates  by  75.4%/33.2%/13.2%  for  the  next three  years. We also  trim our  valuation  to  -1SD  from the mean of its 5-year  trading  range,  ie  to  0.4x  FY16  P/BV.  As  such,  our  TP  is  now  at MYR0.54  –  which  implies  P/Es  of  10.8x/7.6x  for  FY16/FY17,  which  we deem as fair. Downgrade to NEUTRAL (from Buy). 

Financial Exhibits

Financial Exhibits

SWOT Analysis

Company Profile

Hiap  Teck  Venture  is  primarily  involved  in  pipe  manufacturing  and  the  trading  of  general  steel  products.  The  company  has  also ventured into upstream steel-making via 55%-owned Eastern Steel.

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Source: RHB