Stock Name: HIAPTEK
Company Name: HIAP TECK VENTURE BHD
Hiap Teck Venture Bhd
(June 30, 93.5 sen)
Downgrade to sell at 94.5 sen with revised target price of 70 sen (from RM1.05): Annualised, Hiap Teck's 9MFY11 core net profit of RM8.7 million (-77.1% year-on-year) came in way below our and street estimates.
The discrepancy was largely due to a weaker-than-expected earnings before interest and tax (Ebit) margin of 2.8% compared to our full-year (Hiap Teck's financial year ends in July) assumption of 5.8%.
Results were dragged down by the razor-thin operating margin due to weak demand and selling prices coupled with the rising cost of raw materials. As expected, no dividend was declared for the quarter.
In 3QFY11, Hiap Teck reported a net profit of RM5.4 million (-68% y-o-y; +21.6% quarter-on-quarter) on the back of RM236 million sales.
Sales fell by 3.4% q-o-q and 18.4% y-o-y on lower sales volume and selling prices due to weak demand from both the domestic and export
markets.
Ebit margin also contracted significantly to 4.5% (3QFY10: 8.7%; 2QFY11: 2.8%) due to higher raw material costs and low capacity utilisation.
In 3QFY11, hot rolled coils (HRC) prices averaged US$618 (RM1,866) per tonne against US$508 per tonne in 3QFY10 (+22% y-o-y).
In the near term, we believe demand will continue to be challenging following the Japan earthquake, the political unrest in the Middle East and North Africa and the re-emergence of the sovereign debt crisis in Europe.
In addition, domestic demand has yet to see a significant pick- up. Given the upcoming fasting month and the summer lull period, we expect domestic demand will remain soft.
Also, the rise in the cost of inputs has more than outpaced the increase in selling prices, thereby adding pressure to margins. In the pipeline, Hiap Teck through its 55% stake in Eastern Steel is setting up a mini blast furnace with an annual installed capacity of up to 700,000 tonnes, with capital expenditure of circa'' RM850 million.
The company has proposed a fund-raising exercise totalling RM393 million through a 1:1 rights issue at an indicative price of RM0.68 per share and bond issuance of up to RM180 million.
In view of the moderating demand and weak selling prices, we have cut our average selling price (ASP) assumptions for 2011 to 2013 by 5% to 7%.
This led to a 40% to 50% cut in our earnings forecast. Target price has been cut to 70 sen (from RM1.05), despite rolling over our valuation horizon to FY12 but still based on an unchanged seven times price-earnings ratio.
Share price performance has been consistent with our call, but we think the outlook in 2HCY11 will continue to be challenging, hence we downgrade Hiap Teck from 'reduce' to 'sell'.
De-rating catalysts include weak demand both from domestic and external markets coupled with earnings dilution from the proposed rights issue as we expect new earnings stream from the plant expansion will only come through from 2013 onwards. ' Affin IB Research, June 30
This article appeared in The Edge Financial Daily, July 1, 2011.
Company Name: HIAP TECK VENTURE BHD
| Research House: AFFIN | Price Call: SELL | Target Price: 0.70 |
Hiap Teck Venture Bhd
(June 30, 93.5 sen)
Downgrade to sell at 94.5 sen with revised target price of 70 sen (from RM1.05): Annualised, Hiap Teck's 9MFY11 core net profit of RM8.7 million (-77.1% year-on-year) came in way below our and street estimates.
The discrepancy was largely due to a weaker-than-expected earnings before interest and tax (Ebit) margin of 2.8% compared to our full-year (Hiap Teck's financial year ends in July) assumption of 5.8%.
Results were dragged down by the razor-thin operating margin due to weak demand and selling prices coupled with the rising cost of raw materials. As expected, no dividend was declared for the quarter.
In 3QFY11, Hiap Teck reported a net profit of RM5.4 million (-68% y-o-y; +21.6% quarter-on-quarter) on the back of RM236 million sales.
Sales fell by 3.4% q-o-q and 18.4% y-o-y on lower sales volume and selling prices due to weak demand from both the domestic and export
markets.
Ebit margin also contracted significantly to 4.5% (3QFY10: 8.7%; 2QFY11: 2.8%) due to higher raw material costs and low capacity utilisation.
In 3QFY11, hot rolled coils (HRC) prices averaged US$618 (RM1,866) per tonne against US$508 per tonne in 3QFY10 (+22% y-o-y).
In the near term, we believe demand will continue to be challenging following the Japan earthquake, the political unrest in the Middle East and North Africa and the re-emergence of the sovereign debt crisis in Europe.
In addition, domestic demand has yet to see a significant pick- up. Given the upcoming fasting month and the summer lull period, we expect domestic demand will remain soft.
Also, the rise in the cost of inputs has more than outpaced the increase in selling prices, thereby adding pressure to margins. In the pipeline, Hiap Teck through its 55% stake in Eastern Steel is setting up a mini blast furnace with an annual installed capacity of up to 700,000 tonnes, with capital expenditure of circa'' RM850 million.
The company has proposed a fund-raising exercise totalling RM393 million through a 1:1 rights issue at an indicative price of RM0.68 per share and bond issuance of up to RM180 million.
In view of the moderating demand and weak selling prices, we have cut our average selling price (ASP) assumptions for 2011 to 2013 by 5% to 7%.
This led to a 40% to 50% cut in our earnings forecast. Target price has been cut to 70 sen (from RM1.05), despite rolling over our valuation horizon to FY12 but still based on an unchanged seven times price-earnings ratio.
Share price performance has been consistent with our call, but we think the outlook in 2HCY11 will continue to be challenging, hence we downgrade Hiap Teck from 'reduce' to 'sell'.
De-rating catalysts include weak demand both from domestic and external markets coupled with earnings dilution from the proposed rights issue as we expect new earnings stream from the plant expansion will only come through from 2013 onwards. ' Affin IB Research, June 30
This article appeared in The Edge Financial Daily, July 1, 2011.
No comments:
Post a Comment