Hiap Teck ... Apr10

Affin Investment Bank RESULTS REVIEW & EARNINGS OUTLOOK

Records 1HFY07/10 net profit of RM21.1m. Hiap Teck’s earnings showed considerable improvement on a yoy basis, recording net profit of RM21.1m for 1HFY07/10 compared to a net loss of RM2.4m for 1HFY07/09. Earnings was largely driven by a lower cost
base as revenue declined by a slight 9% yoy to RM531.1m due to lower sales volume. Meanwhile, EBIT margins improved to 6.3% compared to 5.5% for 1HFY07/09.

2QFY07/10 earnings contracted by 77% qoq.
Sequentially, Hiap Teck’s 2QFY07/10 net profit contracted by 77% to RM4.0m, in tandem with the 10% qoq decline in revenue to RM251.4m. Earnings were largely dragged down by the lackluster demand ahead of the Christmas and CNY festivities. Nonetheless, we expect demand to gather momentum in quarters ahead in tandem with expectations of a broad economic recovery.

Results are below expectations. Hiap Teck’s 1HFY07/10 net profit only accounted for 35% and 33% of our and consensus full-year estimates. We are however keeping our forecast unchanged, in anticipation of stronger quarters ahead with an expected pick up in demand post CNY lull. Steel prices are also on the rise, with global HRC prices gaining by 22% since end Jan-10, translating into higher average selling prices for Hiap Teck.

RECOMMENDATION
Maintain BUY, unchanged TP of RM1.76. We remain sanguine on Hiap Teck’s earnings prospects, projecting net profit to grow by a strong 41% yoy for FY07/10.
Valuations are undemanding, trading at CY10 PE of 7.0x. Maintain BUY with an unchanged TP of RM1.76, pegged to CY10 PE of 8.5x (mid-point of historical average and 1SD above mean).