KUALA LUMPUR: There could be sequential earnings improvement in store for Hiap Teck Venture Bhd
as steel prices continue to rise amid optimism over China's economic reopening, says Hong Leong Investment Bank (HLIB) Research.
Following the release of positive earnings in the 2QFY23, the company's management has guided for improved earnings in the subsequent quarter, supported by both improving prices and a seasonal recovery in domestic steel demand.
It reported that in 2QFY23, Eastern Steel Sdn Bhd's (ESSB) core contribution to Hiap Teck increased to RM16.8mil after adjusting for RM16mil forex translation gain.
Higher contribution from ESSB, improved steel prices, and lower key input prices resulted in HTVB’s core net loss narrowing to RM400,000, from RM23.5mil in1QFY23.
Over the longer term, the recovery in steel prices will likely remain uneven and patchy due to global inflationary pressures, rising interest rates, volatile exchange rates, geopolitical issues and the banking turmoil.
However, management highlighted that earnings growth potential is expected to remain, underpinned by ESSB's major capacity expansion.
HLIB noted that ESSB continues to run all four of its coking coke plants since 2QFY23 although the cost of processing coking coal into coke remains high relative to purchasing coking coke.
"Management is optimistic that the coal-coke spread will continue to widen within the next six months (as and when steel mill capacity utilisation in China picks up), and higher cost of coking coal processing (vs purchasing coking coke) will be partly mitigated by cost savings from electricity generated by coke oven plants," said the research firm in its company update.
HLIB maintained its earnings forecast and "buy" call with a target price of 38 sen.
"We continue to like HTVB for its healthy balance sheet (net gearing of 0.27x as at 31 Jan 2023), and multi-year growth potential in ESSB’s earnings, supported by its continuous efforts in enhancing cost efficiencies and major capacity expansion," it said.
