PETALING JAYA: Hiap Teck Ventures Bhd is on track to post improved financial results in its third quarter ending April 2023 (3Q23), backed by higher steel prices and demand and contribution from associate company, Eastern Steel Sdn Bhd (ESSB).
Hong Leong Investment Bank (HLIB) Research said the steel maker’s management has guided for sequential earnings recovery, supported by continued increase in steel prices (amid optimism on China’s economic reopening) and seasonal recovery in domestic steel demand.
“While the recovery in steel prices (and margins) will likely remain uneven and patchy, its management highlighted that earnings growth potential remains, underpinned by ESSB’s major capacity expansion,” HLIB Research said in its latest report following a recent meeting with Hiap Teck’s management.
The research house added that the expansion of ESSB’s blast furnace will boost its annual rated capacity from 0.7 million tonnes at present to 2.7 million tonnes upon completion in July this year, while its hot rolled coil (HRC) plant is scheduled for completion by mid-2024.
The ESSB facility however faces cost pressures as the cost of processing coking coal into coke remains high, relative to purchasing coking coke.
ESSB has been running all its four coking coke plants since 2Q23 (ended Jan 31, 2023) as management is optimistic the coal-coke spread will continue to widen in the next six months, while the higher cost of coking coal processing (versus purchasing coking coke) will be partly mitigated by cost savings from electricity generated by coke oven plants.
With its prospects improving, HLIB Research has maintained its “buy” rating on Hiap Teck with an unchanged target price of 38 sen a share, based on unchanged seven-times FY24 core earning per share of 5.4 sen.
“We continue to like Hiap Teck for its healthy balance sheet (net gearing of 0.27 times as at Jan 31) and multi-year growth potential in ESSB’s earnings, supported by its continuous efforts in enhancing cost efficiencies and major capacity expansion,” HLIB Research said.
At the current price of 34.5 sen, Hiap Teck shares are trading at FY23-FY25 price-earnings multiple of 11.7 times, 6.4 times and 5.9 times respectively. To recap, Hiap Teck posted improved results for the second half of its financial year (2H23) with the steel producer turning to the black with a core net profit of RM15.6mil for the second quarter (2Q23), versus a net loss of RM23.5mil in 1Q23.This took its core net loss for the six months ended Jan 31, 2023, to RM7.9mil.