Friday, June 27, 2008

Can Hiap Teck's Fortunes Continue?

The Star: Steel pipe maker Hiap Teck Venture Bhd posted a 180% increase in net profit to RM45.96mil for its third quarter ended April 30 compared with a year earlier while revenue was 32.83% higher at RM445.86mil.

In a note accompanying its quarterly result, the company said higher business volume on the back of strong market demand coupled with an increase in steel prices contributed to its better performance. It added that better profit margins for steel products also contributed to the improved showing. Group managing director Kua Hock Lai said that going forward, margins might soften because cost was catching up with the selling price of the company's products.

Steel bar prices have adjusted to international levels after the Government lifted the price cap and waived the requirement for approval permits and import duties from May 12. Kua said the company was targeting between 15% and 30% of its manufacturing division's earnings to come from the oil and gas application product line in the next financial year. In the year ended July 31, 2007 manufacturing added 55% to earnings while the trading division contributed the balance. “Currently, this product line contributes less than 15%,” Kua said. He said the trading division had more exposure to the local market while the manufacturing division was not so exposed.

“We export between 50% and 60% of the products from the manufacturing division,” Kua said, adding that exports contributed 25% to earnings. He said the company planned to expand its exports to the United States and Europe. “We have very good tie-ups with international steel trading houses which will come in handy in our future plans,” Kua told StarBiz. He said the company had just started exporting to the United States. This month alone shipments there made up about 30% of Hiap Teck's exports, he said.

Due to the countervailing duties and anti-dumping measures imposed on Chinese steel pipe products by the US government in recent days, we see an opportunity for us to further penetrate this market,” he said. Kua said the company's order book stood at two to three months versus the industry average of 1½ to two months. The company has an annual steel pipe production capacity of 580,000 tonnes and an average capacity utilisation of between 60% and 65%.

The mismatch in material cost with the lifting of ceiling prices may have exaggerated performance, but that kind of margin would narrow dramatically in the coming months.
The 15% export levy imposed on Chinese welded steel products early this year boosted demand, and in fact created a huge shortage globally.

Coincidentally, Hiap Teck also managed to get the CE certification which will allow them to sell to Europe effectively.
Going forward, revenue should pick up further, in particular from exports, but investors should not expect similar margins like the just announced quarter.

Issued Capital: 327.4m

52 week High-Low: 2.47-1.44

BV/share: 1.26

Should make 38 sen per share in 2008, thats a pretty low PER even assuming zero growth. If you like steel prices over the next 12 months, Hiap Teck should benefit enormously. Good to buy for the next 2 quarters' earnings which should continue to surprise on the upside considering its capacity utilisation of just 60% - hence great economies of scale with additional orders from overseas. Current price: 1.65. Look for a swift retest of its 52 week high of 2.47.

p/s photos: Han Chae Young


AQW said...

Similar case for Engtex also...

mantua said...

I asked about Hiaptek because its price chart yielded very strong tecnical indicators (to Buy)just before the Oct'06 bull run. Following an explosive breakout on 10/10/06, it trebled in price within a year.

Current price congestion between 160 & 180, but technical signs are unclear, hence my seeking for guidance on fundamentals. Interesting.

BTW, Hiaptek is the first Malaysian steel pipe manufacturer to get API approval for use in oil wells (high profit margins!). Choo Bee has also sought certification but not approved yet.