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Friday, June 28, 2013

Hiap Teck Venture - Above Expectations (OSK)

Hiap Teck Venture (HTVB) made a strong come back in 3QFY13 with a net profit of MYR9.1m (+>100% q-o-q), exceeding our and street estimates. The company has yet to book in earnings from its blast furnace plant, which it expects to complete by end-2013. We have revised our earnings model following the internal reallocation of coverage resources. Maintain Trading BUY, with our new MYR0.66 FV derived from a 0.5x FY14F P/E.
 Strong comeback in 3Q. HTVB reported 3QFY13 net profit of MYR9.1m (+>100% q-o-q, -27.2% y-o-y), a strong comeback after having posted sluggish net earnings of MYR1.7m in the preceding quarter. Its EBITDA margin improved by 3.4%-pts q-o-q despite the flattish revenue sequentially, mainly attributed to lower production cost on more effective controls and higher production efficiency.
 Blast furnace plant yet to generate earnings. As the company targets to complete its blast furnace plant by end-2013, it has yet to realize any contribution from this segment. Nonetheless, we believe that once the plant starts operation, it should contribute positively to the Group’s bottomline.
 Change of analyst and valuation method. Due to our internal resource reallocation, there had been a switch in the analyst covering HTVB as well as a change in our valuation methodology on the stock. We are now valuing HTVB using a P/B multiple, given that earnings growth may not be too significant before its blast furnace plant is completed. Therefore, we believe that the P/B valuation method should be more reflective of the company’s true value.
 Maintain Trading BUY, FV revised up. Based on our new valuation methodology that pegs HTVB to 0.5x FY14F P/B, we revise our FV upwards to MYR0.66, which still offers investors a potential upside of 26%. Nonetheless, as the business of steel counters is cyclical in nature, with volatile earnings, we maintain our Trading BUY recommendation on HTVB.

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