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PP 7767/09/2010(025354)

1 July 2010

Malaysia Corporate Highlights


RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

R e su l ts N o t e
1 July 2010
MARKET DATELINE

Hiap Teck Venture Share Price


Fair Value
:
:
RM1.29
RM1.28
3QFY07/10 Performance Improves on Better Recom : Underperform
Margins; But Likely to Weaken in Coming Quarters (Downgraded)

Table 1 : Investment Statistics (HIAPTEK; Code: 5072) Bloomberg: HTVB MK


Net Core EPS Net
FYE Turnover profit EPS EPS# Growth# PER# C.EPS* P/NTA Gearing ROE GDY
July (RMm) (RMm) (sen) (sen) (%) (x) (sen) (x) (x) (%) (%)
2009a 1,159.3 42.7 13.0 5.3 -88.7 24.3 - 0.7 0.7 3.1 0.8
2010f 1,531.8 50.7 15.5 15.5 >100 8.3 18.2 0.7 1.1 8.3 1.6
2011f 1,736.2 59.0 18.0 18.0 16.3 7.2 20.9 0.6 1.2 8.8 1.9
2012f 1,816.9 61.0 18.6 18.6 3.4 6.9 27.0 0.6 1.1 8.5 1.9
Main Market Listing / Trustee Stock / Syariah-Approved Stock By The SC * Consensus Based On IBES Estimates

♦ Within our expectation, but below market consensus. 9MFY07/10 RHBRI Vs. Consensus
reported net profit of RM38.0m came in within our expectation, accounting Above
In Line
for 75% of our full-year forecast. As against the market expectations, the
Below
results came in below, at only 63.7% of the full-year market consensus.
♦ YoY. Despite revenue falling by 4.2% to RM820.7m, 9MFY07/10 returned to Issued Capital (m shares) 327.4
Market Cap(RMm) 422.4
the black with a net profit of RM38.0m from a net loss of RM4.4m a year
Daily Trading Vol (m shs) 0.7
ago. This was mainly due to:
52wk Price Range (RM) 0.88 – 1.57
1. The absence of provision for diminution in inventory value and Major Shareholders: (%)
unrealised foreign exchange loss. Recall, Hiap Teck made a total KHL Sdn Bhd 18.1
provision of RM40.4m for diminution in inventory value and unrealised TS Law Investments 16.8
foreign exchange loss last year; Lembaga Tabung Haji 6.7

2. Margin expansion arising from lower input costs; and FYE Jul FY10 FY11 FY12
EPS Revision (%) - - -
3. A 32.1% decline in finance costs to RM9.5m.
Var to Cons (%) -15.1 -13.7 -31.2
♦ QoQ. 3QFY07/10 net profit more thaN tripled to RM16.9m from RM4.0m
and this was mainly driven by: PE Band Chart

1. Higher sales volumes; and PER = 10x


PER = 8x
2. Margin expansion arising from selling prices that rose faster than input PER = 6x
PER = 4x
costs.
♦ Weaker quarters ahead. The near-term prospects of steel products in the
international market are likely to be weak in the next few quarters on the
back of: 1) the heightened risk on a sharper-than-expected slowdown in
global economy; and 2) Increased concerns on overcapacity in China that
will result in weaker demand and prices of steel products. Relative Performance To FBM KLCI

♦ Risks. These include: (1) Oversupply in China that results in dumping


activities by Chinese steel producers in the international market; and (2)
Steep contraction in global steel consumption that will weigh down on Hiap Teck
international steel prices.
♦ Earnings forecasts. Maintained. FBM KLCI

♦ Investment case. Indicative fair value remains unchanged at RM1.28


based on 7x unchanged CY2011 EPS of 18.3 sen. However, we are
downgrading our recommendation on the stock from Market Perform to
Chye Wen Fei
Underperform, as valuations have become stretched following the recent
(603) 92802172
rise in share price. chye.wen.fei@rhb.com.my

Please read important disclosures at the end of this report.

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1 July 2010

Table 2: Earnings Review (YoY Cumulative)


FYE July 2009 2010 % YoY Observations/ Comments
(RMm) 9M 9M Chg
Turnover 856.7 820.7 -4.2 Due mainly to lower average selling price, in particular, 1QFY07/09.
Operating profit 2.6 62.7 >100 Boosted by: 1) margin expansion arising from input costs; and 2) the
absence of inventory writedown and foreign exchange loss.
Finance costs -13.9 -9.5 -32.1 Due to lower financing costs.
Pretax profit/ (loss) -11.4 53.2 >100 Boosted further by lower finance costs.
Taxation 7.0 -15.2 >100
Net profit/ (loss) -4.4 38.0 >100 Filtered down from pretax profit.
EPS (sen) -1.4 11.8 >100

Operating margin (%) 0.3 7.6 7.3 pts


Pretax margin (%) -1.3 6.5 7.8 pts
Net profit margin (%) -0.5 4.6 5.1 pts
Effective tax rate (%) 61.3 28.6 -32.7 pts Provision for inventory writedown and foreign exchange loss in
9MFY07/09 was not tax deductible.

Table 3: Earnings Review (QoQ)


FYE July 2010 2010 2010 % QoQ Observations/ Comments
(RMm) 1Q 2Q 3Q Chg
Turnover 279.6 251.4 289.6 15.2 Boosted by: (1) higher average selling price; and (2) higher
sales volumes.
Operating profit 26.5 10.2 25.9 >100 Margin expansion arising from better selling prices.
Finance costs -2.9 -3.2 -3.4 6.9 Net debt increased to RM237.7m from RM220.6m in 2Q.
Pretax profit 23.6 7.1 22.6 >100 Filtered down from operating profit.
Taxation -6.4 -3.1 -5.7 81.5
Net profit 17.2 4.0 16.9 >100 Filtered down from pretax profit.
EPS (sen) 5.3 1.2 5.2 >100

Operating margin (%) 9.5 4.1 9.0 4.9 pts


Pretax margin (%) 8.4 2.8 7.8 5.0 pts
Net profit margin (%) 6.1 1.6 5.8 4.2 pts
Effective tax rate (%) 27.1 44.2 25.2 -19.0
pts

Table 4: Earnings Forecasts Table 5: Forecast Assumptions


FYE Jul (RMm) FY09A FY10F FY11F FY12F FYE Jul FY10F FY11F FY12F

Turnover 1,159.3 1,531.8 1,736.2 1,816.9 Manufacturing Division


Turnover growth (%) -30.2 36.2 13.3 4.6 Total capacity ('000 mt) 660.0 660.0 660.0
Total production volume ('000 mt) 390.0 440.0 460.0
EBITDA 74.1 121.0 144.7 150.5 Total utilisation rate (%) 59.1 66.7 69.7
EBITDA margin (%) 6.4 7.9 8.3 8.3
Trading Division
Depreciation -23.8 -20.1 -20.1 -20.1 Revenue (RMm) 381.3 394.2 413.9
Net Interest -17.4 -25.0 -34.5 -36.8 EBIT margin 6.0% 6.5% 6.5%

Pretax Profit 32.9 75.9 90.1 93.6


Tax 9.8 -25.2 -31.2 -32.6
Minorities 0.0 0.0 0.0 0.0
Net Profit 42.7 50.7 59.0 61.0
Extraordinary Items 25.3 0.0 0.0 0.0
Core Net Profit 17.4 50.7 59.0 61.0
Source: Company data, RHBRI estimates

IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank Berhad
(previously known as RHB Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances as may be permitted by applicable law. The
opinions and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may differ or
be contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be
construed as an offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein in any
manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated persons
may from time to time have an interest in the securities mentioned by this report.

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This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives
of persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate
particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or
strategy will depend on an investor’s individual circumstances and objectives. Neither RHBRI, RHB Group nor any of its affiliates, employees or agents accepts
any liability for any loss or damage arising out of the use of all or any part of this report.

RHBRI and the Connected Persons (the “RHB Group”) are engaged in securities trading, securities brokerage, banking and financing activities as well as providing
investment banking and financial advisory services. In the ordinary course of its trading, brokerage, banking and financing activities, any member of the RHB
Group may at any time hold positions, and may trade or otherwise effect transactions, for its own account or the accounts of customers, in debt or equity
securities or loans of any company that may be involved in this transaction.

“Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding company and the respective directors,
officers, employees and agents of each of them. Investors should assume that the “Connected Persons” are seeking or will seek investment banking or other
services from the companies in which the securities have been discussed/covered by RHBRI in this report or in RHBRI’s previous reports.

This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflect
information known to, professionals in other business areas of the “Connected Persons,” including investment banking personnel.

The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based
upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.

The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on
higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

RHBRI is a participant of the CMDF-Bursa Research Scheme and will receive compensation for the participation. Additional information on recommended
securities, subject to the duties of confidentiality, will be made available upon request.

This report may not be reproduced or redistributed, in whole or in part, without the written permission of RHBRI and RHBRI accepts no liability whatsoever for the
actions of third parties in this respect.

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