Hiap Teck ... Jan10

Hiap Teck recently acquired a 55% stake in Eastern Steel for RM110 million cash, or a price-to-book value (P/BV) of 1.4 times. While the valuation appears on the high side, the acquisition comes with a proposed blast furnace project, some 600 acres (234ha) land in the Teluk Kalung Estate in Kemaman, Terengganu and other tax incentives

Hiap Teck’s current gross debts amounting to RM393.3 million with cash of RM171.2 million and shareholders’ funds totalling RM600.5 million, translate into a net gearing of 37%. Around RM110 million will be spent on the 55% stake and additional capital expenditure (capex) of RM750 million to RM850 million for the blast furnace.
This will bring Hiap Teck’s total outlay to at least RM860 million, bringing its debts level to RM1.14 billion. This would inflate its net gearing to 180.2%. Even factoring in an effective 55% share of the additional capex, Hiap Teck’s net gearing would still balloon to 124%.

At this point of time, there are no concrete details on the mode of funding, but there is a possibility of Hiap Teck partly funding it through a rights issue to pare down its gearing, which may in turn have an adverse impact on sentiment in the stock.