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Thursday, September 25, 2014

Hiap Teck’s earnings to come mostly from manufacturing (Edge)

Maintain “buy” with target price of RM1: Hiap Teck is likely to announce its financial year 2014 (FY14) earnings tomorrow. We believe the figures will be mostly within our expectations. We expect Hiap Teck to close FY14 with a decent earnings growth of >80% year-on-year (y-o-y). The main earnings contributor will likely be its manufacturing arm.

Its long-awaited blast furnace plant (Phase 1) is going to be completed. Hiap Teck expects the plant to commence operations by end-October/early November. The plant will likely have 700,000 slab production capacity. We expect the plant to incur start-up losses in the first and second quarters (1Q and 2Q) in FY15, possibly break even in 3Q and report profit by 4Q. We take a more conservative stance and expect the initial losses from the plant to be around RM15 million (from RM8 million).

Hiap Teck has taken its first step towards iron ore mining by subscribing to a 55% equity interest in Vista Mining Sdn Bhd, a company involved in iron ore exploration, mining and processing operations.

Management expects the operation (possibly in Bukit Besi, Terengganu) to start in early 2015. At the current iron ore price of about US$80 (RM259) per tonne, we think that the margin may not be as lucrative, but it would help to sustain the raw material supply to its blast furnace plant, and possibly enable cost savings to improve the plant’s profit margin. More details on its mining operations should be ironed out in due course.

We keep our FY14F earnings unchanged but adjust our FY15F earnings by -9% after incorporating a larger share of losses from Eastern Steel.

We maintain our “buy” recommendation on Hiap Teck with an unchanged fair value of RM1, pegged to 0.72 times FY15F price to book value, which is +2 standard deviation from its five-year historical trading mean. — RHB Research, Sept 24

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