Hiap Teck Venture Bhd
(March 27, 51.5 sen)
Downgrade to hold call with a lower target price (TP) of 50 sen: We cut our estimated earnings for the financial year ending July (FY15E) to FY16E earnings by 7% to 65% to reflect the losses from its associate. 

Given the earnings downgrade, we have lowered our TP to 50 sen as we roll forward our valuation horizon to calendar year 2016 (CY16) but still based on unchanged 13 times price-earnings ratio (two-year average). 

We downgrade our call to “hold” from “buy”. Risks to our recommendation are: (i) prolonged dumping activity; and (ii) continued moderating economic growth.

In the first half (1H) ended January of FY15, Hiap Teck reported a core net loss of RM3.2 million (against our FY15 net profit expectation of RM40.2 million). 

This was grossly below our and street estimates. For us, the deviation was due to the huge losses registered by its associates. As expected, no dividend was declared.

Hiap Teck’s revenue for the second quarter (2Q) of FY15 grew by a strong 16.2% year-on-year (y-o-y) driven by both the trading division (+30% y-o-y) and manufacturing business (+4% y-o-y) on strong sales volume from the domestic market. 

Despite the strong top line growth, Hiap Teck recorded a loss before tax of RM1.9 million (2QFY14: profit before tax of RM12.2 million) due to loss from its associates — Eastern Steel, primarily due to foreign currency translation losses as a result of the strengthening US dollar.

We expect international prices to remain under pressure on the back of a moderating global economic growth. 

However, we believe the impact will be partially cushioned as we expect domestic demand for steel products to remain buoyant on the back of existing and upcoming construction and infrastructure projects. — Affin Hwang Research, March 27

This article first appeared in The Edge Financial Daily, on March 30, 2015.