HiapTeck ... Jul10

RESULTS REVIEW & EARNINGS OUTLOOK

Records 9MFY07/10 net profit of RM38m.
Cumulatively, Hiap Teck’s earnings recorded a vast improvement with 9MFY07/10 core net profit of RM38.0m. This compares to a dismissal 9MFY07/09 core net loss of RM4.4m. In essence, earnings were mainly driven by a lower cost base as revenue declined by a slight 4% yoy to RM820.7m - due to lower sales volume. This is also reflected in an improvement in EBIT margin (9MFY07/10: 6.3% vs 9MFY07/09: 5.5%).

3QFY07/10 earnings surged 3 fold qoq to RM16.9m.
The Group chalked up a core net profit of RM16.9m in 3QFY07/10 vs a net loss of RM2.0m in 3QFY07/09. Key earnings driver were: (1) a 40% yoy increase in HRC
prices; (2) likely higher volume; and (3) economies of scale. Sequentially, Hiap Teck’s 3QFY07/10 net profit picked up by 3x with topline surging 15% qoq to
RM289.6m. Earnings were mainly driven by higher sales volume and improved selling prices (+14% qoq).

Results are below expectations. Hiap Teck’s
9MFY07/10 net profit only accounted for 63% and 64% of our and consensus full-year estimates. We are however keeping our forecast unchanged, pending a management update.

RECOMMENDATION
ADD call and RM1.76 PT, based on 8.5x CY10 PER is currently under review. Stepping forward, we are likely turning cautious on the steel sector as a whole. Outlook for the steel industry is expected to be a challenge from hereon due to four key reasons: (1) Limited upside for average selling prices (ASP) of steel due to ongoing concern on sovereign default risk in Europe and China’s restraint on its property market leading to a slowdown in steel consumption; (ii) Higher raw material prices, as prices of scrap metal are sticky and iron ore are escalating – especially with potentially higher mining taxes to be introduced by the Australian
government in the longer term; and (iii) Proposed cut in subsidy on power and natural gas will increase the production cost of steel.

Inline with our view, The Malaysian Iron and Steel Industry Federation (Misif) has also revised downward Malaysia’s average steel consumption growth to 5% for
2010, from 10%-12%.

Affin Investment Bank is currently reviewing our ADD rating and RM1.76 PT (based on 8.5x CY10 PER) pending a management update.