We keep  our NEUTRAL rating and MYR0.54 TP (2.9% upside)  and make no changes  to our  earnings  estimates  for the next three years. Our TP reflects  FY16F  P/BV of 0.4x (-1SD  to its 5-year mean). 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.

1HFY15  (Jul)  slips into  the  red.  As expected, Hiap Teck Venture (Hiap Teck) posted a loss of MYR6.1m in 2Q,  which pushed  the company into a  MYR3.2m  loss  for  1HFY15.  Its  55%-owned  Eastern  Steel  SB continued to drag with a MYR16.1m loss in 2Q, as weakening MYR over the reporting  period  required  the  unit to book an unrealised marked-tomarket forex loss given that the advance provided by its Chinese partner was in USD terms. Meanwhile, its trading division also recorded a 12.5% QoQ  drop  in  revenue,  resulting  in  EBITDA  falling  10.5%  QoQ  to MYR4.7m.  On  a  positive  note,  sales  from  its  manufacturing  division picked  up  strongly,  and  EBITDA  surged  41.8%  QoQ  despite  falling 22.9% YoY.

Eastern  Steel  may  incur  further  start-up  costs.  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  growth in  its trading  division. However, we expect Eastern Steel to book start-up costs due to diminishing cost advantage of its blast furnaceover electric arc furnaces after the recent plunge in scrap prices.

Maintain  NEUTRAL  and  MYR0.54  TP.  As  we  expect  further  start-up losses from Eastern Steel SB, we are keeping our conservative earnings estimates  for  now.  We  also  continue  to  value  the  company  at  0.4x FY16F  P/BV, which is -1SD from its 5-year P/BV mean.  As such, our TP is  maintained at MYR0.54, implying  P/Es of 10.8x/7.6x  for FY16/FY17, which we deem fair. Reiterate NEUTRAL.

Source: RHB