Hiap Teck picking up slowly

by **Cals** Thu 13 Jun 2013, 10:57

Business & Markets 2013

Written by Affin IB Research

Thursday, 13 June 2013 10:41

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Hiap Teck Ventures Bhd
(June 12, 51sen)
Maintain add at 52 sen with a revised target price of 55 sen (from 49 sen): Local demand for steel products has been improving on the back of various infrastructure and CONSTRUCTION [] projects. This is reaffirmed as Hiap Teck’s trading segment business, which trades mainly in construction steel products, has seen a better profit margin. However, while demand for pipe products is improving from the trough level, we do not expect the momentum to be strong. Based on the recent election results, we do not expect the Pahang-Selangor interstate water project to be revived anytime soon. So we take the prudent view that demand for steel pipes will remain moderate for the rest of 2013.
The softening economic outlook in China has created a persistent oversupply of steel products. This has led to dumping, which has capped any potential recovery in steel prices. We gather that the steel association board is lobbying for the implementation of non-tariff measures in order to contain the excess supply of steel products in the domestic market. Against the backdrop of an oversupply situation, we make no changes to our plant utilisation assumption rate of between 48% and 55% for the 2013 financial year (FY13) to FY15.
We gather the average domestic selling price is currently at around RM2,600 per tonne. However, due to the oversupply, management indicated that average selling prices (ASPs) have been on the downtrend. Due to a soft global economic environment as well as China’s moderating GDP growth, we do not expect global steel demand to pick up significantly in the second half of the year. As such, we believe any potential recovery in international price will be capped, hence capping if not further weakening domestic selling prices.

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Because of the cut in ASP, our FY13 to FY15 earnings forecast has been lowered by 28% to 32%. Since early this year, Hiap Teck’s share price has appreciated by 13%, consistent with our recommendation. Maintain “add”. Downside risk to our call would be prolonged dumping and a delay in the construction of the blast furnace which may result in cost overruns. — Affin IB Research, June 12

This article first appeared in The Edge Financial Daily, on June 13, 2013.