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PP 7767/09/2010(025354)

RHB Research2010
1 October
Corporate Highlights Institute Sdn Bhd

Malaysia
A member of the
RHB Banking Group
Company No: 233327 -M

R e su lts N ot e
1 October 2010

MARKET DATELINE
Hiap Teck Venture Share Price
Fair Value
:
:
RM1.31
RM1.63
FY07/10 Results Boosted By Better Margins Recom : Outperform
(Upgraded)

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 43.4 13.3 5.6 -88.2 23.5 - 0.8 0.7 3.1 0.8
2010a 1,065.3 50.7 15.7 15.7 >100 8.3 16.5 0.7 1.1 6.9 1.5
2011f 1,692.2 52.5 16.0 16.0 2.0 8.2 18.3 0.7 1.2 8.1 1.9
2012f 1,793.9 54.7 16.7 16.7 4.1 7.8 21.0 0.6 1.1 7.8 1.9
Main Market Listing / Trustee Stock / Syariah-Approved Stock By The SC * Consensus Based On IBES Estimates

♦ Above expectations. FY07/10 net profit beat our forecast by 21%, but
RHBRI Vs.
Above
Consensus

was in line with the consensus. We believe the variance against our forecast
In Line
came largely from the better-than-expected margins and lower finance Below
costs.
Issued Capital (m shares) 327.4
♦ Yoy. Despite an 8.1% drop in topline to RM1.07bn as a result of lower Market Cap(RMm) 363.4
demand from both local and international markets, Hiap Teck still managed Daily Trading Vol (m shs) 0.5
52wk Price Range (RM) 1.11 – 1.57
to record a 16.5% rise in net profit from RM43.4m in FY07/09 to RM50.7m
Major Shareholders: (%)
in FY07/10. This was mainly driven by improvement in margins and lower
TS Law Investments 27.2
finance costs. KHL S/B 7.7
Lembaga Tabung Haji 6.6
♦ Qoq. 4QFY07/10 revenue and net profit declined by 18.4% and 33.0%
respectively, mainly due to: 1) Lower sales volume; and 2) A drop in FYE Jul FY11 FY12
operating margins (7.5% in 4QFY07/10 vs. 9.0% in 3QFY07/10). EPS Revision (%) 6.5 7.1
Var to Cons (%) (12.6) (20.5)

♦ Favourable outlook. The near-term outlook of steel products in the PE Band Chart
international market is favourable as steel consumption is seasonally
stronger in 4Q10. Concerns on overcapacity in the steel sector have eased
PER = 16x
following the recent Chinese government’s measures to shut down PER = 12x
PER = 8x
inefficient steel mills in China and cut power supply to steel mills.

♦ Risks. The risks 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
international steel prices. Relative Performance To FBM KLCI

♦ Forecasts. We are raising our FY07/11-12 net profit forecasts by 6.5-7.1% Hiap Teck

to RM52.5m and RM54.7m respectively to reflect the higher margins and


lower finance costs.
FBM KLCI
♦ Investment case. Correspondingly, our indicative fair value for Hiap Teck
has been raised to RM1.63 (from RM1.51), based on 10x revised CY2011
EPS of 16.3 sen. Upgrade to Outperform (from Market Perform) as
valuations have become more attractive.
Joshua CY Ng
(603) 92802158
joshuang@rhb.com.my
Please read important disclosures at the end of this report.

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Table 2: Earnings Review (YoY Cumulative)
FYE July 2009 2010 % YoY Observations/ Comments
(RMm) 12M 12M Chg
Turnover 1,159.3 1,065.3 -8.1 Reduced sales as a result of lower demand both locally and
internationally.
Operating profit 49.0 80.9 65.2 Boosted by: 1) margin expansion arising from input costs; and 2) the
absence of inventory writedown and foreign exchange loss.
Finance costs -17.4 -13.3 -23.8 Lower financing costs
Pretax profit 31.6 67.7 >100 Boosted further by lower finance costs.
Taxation 11.8 -17.1 >(100) See effective tax rate
Net profit 43.4 50.7 16.5 Filtered down from pretax profit.
EPS (sen) 13.5 15.7 17.0

Operating margin (%) 4.2 7.6 3.4 pts


Pretax margin (%) 2.7 6.4 3.7 pts
Net profit margin (%) 3.7 4.7 1.0 pt
Effective tax rate (%) -37.4 25.3 62.7 pts Effective tax rate was fairly consistent with Malaysia’s statutory tax rate.

Table 3: Earnings Review (QoQ)


FYE Jul 2010 2010 2010 2010 % QoQ Observations/ Comments
(RMm) 1Q 2Q 3Q 4Q Chg
Turnover 279.6 251.4 289.6 244.6 -18.4 Lower sales volume.
Operating profit/(loss) 26.5 10.2 25.9 18.2 -42.1 Filtered down from revenue and also lower
margin.
Finance costs -2.9 -3.2 -3.4 -3.8 11.5 Net debt increased to RM449.2m from
RM237.7m.
Pretax profit/(loss) 23.6 7.1 22.6 14.4 -56.3 Filtered down from operating profit.
Taxation -6.4 -3.1 -5.7 -1.9 >100
Net profit/(loss) 17.2 4.0 16.9 12.7 -33.0 Filtered down from pretax profit.
EPS (sen) 5.3 1.2 5.2 3.9 -33.0

Operating margin (%) 9.5 4.1 9.0 7.5 -1.5 pts


Pretax margin (%) 8.4 2.8 7.8 5.9 -1.9 pts
Net profit margin (%) 6.1 1.6 5.8 5.2 -0.6 pt
Effective tax rate (%) 27.1 44.2 25.2 13.3 -11.9 pts

Table 4: Earnings Forecasts Table 5: Forecast Assumptions


FYE Jul (RMm) FY09A FY10A FY11F FY12F FYE Jul FY11F FY12F

Turnover 1,159.3 1,065.3 1,692.2 1,793.9 Total capacity ('000 mt) 660.0 660.0
Turnover growth (%) -30.2 -8.1 11.9 6.0 Total production volume ('000 mt) 330.0 440.0
Total utilisation rate (%) 66.7 69.7
EBITDA 72.8 104.7 133.7 139.0
EBITDA margin (%) 6.3 9.8 7.9 7.7

Depreciation -23.8 -23.8 -20.1 -20.1


Net Interest -17.4 -13.3 -32.7 -34.5

Pretax Profit 31.6 67.7 80.9 84.4


Tax 11.8 -17.1 -28.4 -29.7
Minorities 0.2 0.2 0.0 0.0
Net Profit 43.5 50.7 52.5 54.7
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.

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

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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
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“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.

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securities, subject to the duties of confidentiality, will be made available upon request.

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actions of third parties in this respect.

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