Hiap Teck set to ride on global steel demand recovery

Hiap Teck Venture Bhd’s medium-term prospects are increasingly positive as indicators have emerged that the steel sector may soon be out of the woods.

Among these indicators are the low inventory levels of iron ore and steel in China, which will likely support near-term restocking activities; and the relatively low crude steel output in the country.

According to Hong Leong Investment Bank (HLIB) Research, the property market recovery in the world’s second-largest economy could potentially boost demand for steel.

While that may take time to materialise as China is entering the winter season, which typically slows down construction activities and hence results in slower demand for steel, the brokerage said the fact that the worst may soon be over for the steel sector is reason enough to be optimistic about the outlook for Hiap Teck.

HLIB Research upgraded its rating for the company to “buy” from “hold”, with a higher target price of 33 sen, compared to 24 sen previously.

The improving prospects of Hiap Teck motivated HLIB Research to roll forward the valuation base to the financial year ending July 31, 2024 (FY24), from FY23.

So, the revised target price was valued at seven times estimated FY24 earnings.

“Several positive developments in China, which include easing Covid tracking rules, and government support package have prompted us to turn more positive on Hiap Teck.

“While optimism arising from the development may not translate to actual steel demand so soon (due to seasonal factor), there are indicators which signals that the steel sector may soon be out of the woods,” it said in a report.

The brokerage maintained its earnings forecasts for Hiap Teck, pending the release of the company’s results for the first quarter (1Q) ended Oct 31, 2022, which is due out by the end of next month.

“We believe Hiap Teck’s 1Q23 earnings will likely weaken from 4Q22, due to high key input costs and lower steel prices, hence resulting in a sharp deterioration in profitability; and depressed demand sentiment amid weak steel price trend and steel construction activities,” the research house said.

“Moving into 2Q23, margin will likely recover when inputs acquired at high costs are depleted and demand will remain weak on seasonal factor,” it added.

Overall, HLIB Research said it expected Hiap Teck’s earnings performance to remain subdued in the first half of FY23 (1H23), and to pick up only from 2H23.