Hiap Teck still rated a 'buy'

OSK Research Sdn Bhd has maintained a "buy" rating on Hiap Teck Venture Bhd, citing the impending upside from its iron ore concession in Terengganu as one of the reasons.

"Although an official agreement has yet to be signed for the iron ore concession announced by the Terengganu state government, we are maintaining our view that the official agreement will be inked soon," OSK Research said in a report.

The research house has got a clearer picture of Hiap Teck's investment in Eastern Steel during a meeting with the former's management last week.

It said all parties including Hiap Teck, China Shougang and the Terengganu government, had showed serious commitment to ensure the success of Eastern Steel's blast furnace project.

Hiap Teck came under selling pressure after its shares went ex on December 14, possibly due to concerns of dilution after the company's cash call.

"However, we prefer to keep our view intact in view of its new management's efforts to revitalise the company's core businesses, as well as the potential upside from an iron ore concession.

"We now have a clearer picture of the expansion plan and outlook for Eastern Steel after management met some of our clients last week.

"Hence, we are maintainig our trading buy recommendation with an adjustment fair value of 84 sen (RM0.835) ex-rights issue," OSK Research explained.

Apart from the impending upside from the iron ore concession, the firm preferred to maintain valuation on Hiap Teck's stock, backed by its conservative valuation that is a notch lower than the general steel sector benchmark. It expected some recovery in Hiap Teck's performance as its first quarter financial year 2012 results were in line with OSK's estimates.

According to OSK Research, Hiap Teck's plan to venture upstream into steel making is going as scheduled but this entails a long gestation, with contribution kicking in from 2014.

Meanwhile, the management is revitalising Hiap Teck's core businesses so to maintain sustainable earnings and keep the firm in good financial health, the OSK noted.

Apart from maintaining the existing businesses, Hiap Teck has put in extra efforts to break into a niche market that will possibly fetch better margins, which is in American Petroleum Institute (API)-certified steel pipes.

Such pipes require stringent quality control to ensure there is no leakage at the oil field and involves a steep learning curve.

Recently, the company exported some 10,000 tonnes of API steel pipes to the US, which will increase in time to come.

OSK Research believes that Hiap Teck's core businesses is back on track and will gradually pick up as more orders for API steel pipes are expected to flow in, especially from the US, and as the Malaysian government's projects in 2012 spur domestic demand.

"Undeniably, Hiap Teck's core business may not present any earnings surprise given the gloomy economic outlook and sluggish steel demand during this period, but its new management's efforts since coming on board have been encouraging and worthy of attention," it said.