Hiap Teck Venture Bhd’s (HTVB) 9MFY12 results came in stronger
on both q-o-q and y-o-y basis but the quantum of outperformance is smaller than
expected. We are not too concerned about the iron ore concession award delay
and remain confident that HTVB may ink the official agreement soon. As the
global economy continues to stay uncertain with the steel sector facing strong
headwinds, we are compelled to revise HTVB’s earnings estimates downward. This
gives rise to a slightly lower new FV of RM0.73, which is 0.5x FY13 BV and 10%
DCF value from the possible iron ore concession. We maintain our Trading BUY
call on HTVB as it may see more potential upside with its vertical expansion
plan making good progress, apart from a possible revaluation if the iron ore
concession is secured.
A weak quarter again. For
3QFY12, HTVB’s net profit came in at RM6.7m, which represents a q-o-q and y-o-y
improvement of >100% and 23.1% respectively. This stronger q-o-q performance
was mainly attributable to the recovery of sales after the festive seasons in
2QFY12 and an improved gross profit margin. However, HTVB’s 3QFY12 numbers were
overall below our and consensus estimates, and the 9MFY12 results only met
43.7% of our FY12 full-year earnings forecast. On a y-o-y basis, although both
trading and manufacturing divisions have achieved a higher turnover of RM143.0m
and RM132.4m respectively, compared to RM119.1m and RM117.4m, this positive
performance was offset by the drop in profit margin from 10% for last year to
8% mainly due to the higher cost of production.
Iron ore concession still pending. It has
been 6 months since the Menteri Besar of Terengganu announced the award of the
iron ore mining concession in Bukit Besi to HTVB at the ground-breaking
ceremony for Eastern Steel’s blast furnace (BF) plant. Despite the fact that
the official letter of award has yet to be issued, we are encouraged by Eastern
Steel’s ongoing BF plant construction, which fulfills the condition (that the
company must set up a plant in Kemaman, Terengganu) imposed by the state
government for clinching the iron ore concession,. As such, we are confident
that Eastern Steel may still have a good shot at bagging the lucrative mining
concession.
Mining rights still a sweetener. HTVB’s
BF plant is still under construction and we believe that HTVB already has plans
to source for iron ore to be fed into its BF plant from external parties. Thus,
the unexpected delay in the official award of the iron ore concession is not a
cause for concern and is not expected to jeopardize the company’s prospects in
any way.
Making the right decision to expand during challenging
times. HTVB’s
strategy of moving upstream at this juncture could possibly turn out to be a
wise strategy as we understand that it takes time to construct a steel mill and
also to overcome the learning curve for steel making. By constructing the BF
plant during this challenging period, HTVB could position itself to capture the
next upswing for the steel sector and ride on the recovery phase to boost its
medium- to long-term earnings.
Revise earnings estimates downward. Although
we believe HTVB’s prospects remain intact, the overall sector is still facing
sluggish demand for steel and continuing downward pressure on steel prices,
owing mainly to the weak global economic recovery amid renewed concerns over
the debt crisis in the eurozone. This prompted us to revise HTVB’s FY12 and
FY13 earnings estimates down by 33.6% and 23.8% respectively.
Maintain Trading BUY with revised FV. We
continue to like HTVB in view of its limited downside and the potential upside
surprises arising from: (i) its BF plant which is slated to commence operations
in 2013, (ii) its high chance of securing the iron ore mining concession that
will trigger an upward revaluation of the company, (iii) the fact that the
steel sector may eventually recover due to its cyclical nature, and (iv) the
fact that it is currently trading at a deep discount to its FY12 BV of RM1.28.
We maintain our Trading BUY recommendation with a FV of RM0.73, which is
derived from 0.5x FY12 BV plus 10% iron ore DCF value-add factor.
Source: OSK
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