KUALA LUMPUR: Hong Leong Investment Bank Bhd (HLIB) remains optimistic on Hiap Teck Venture Bhd's earnings prospects, supported by the pending rollout of mega infrastructure projects and robust private sector job flows in Malaysia.
Other factors influencing Hiap Teck's performance include rising capacity utilisation at Eastern Steel Sdn Bhd's (ESSB) bottom line, and weak demand sentiment for steel products in China, which may have bottomed.
As such, HLIB reduced its forecast for Hiap Teck's financial year 2024 core net profit by 9.1 per cent, primarily considering lower downstream earnings before interest and taxes (EBIT) margins and higher assumed finance costs.
"Conversely, we have increased our FY25 core net profit forecast by 28.7 per cent. This adjustment primarily reflects the expected contribution from ESSB expanded capacity.
"Following the revision of earnings and updating our valuation base year from FY24 to FY25, we maintain our buy rating on Hiap Teck," it said in a note today.
The expanded capacity at ESSB is expected to bolster Hiap Teck's earnings, supported by narrowing spreads between end product prices and input costs, particularly for iron ore and coking coal.
HLIB said enhanced economies of scale are anticipated to reduce unit fixed costs, while operational efficiencies from the newly operational conveyor belt (since January 2024) will save on transportation costs.
The firm also said progress is on track for Hiap Teck's hot rolled coil plant, slated for completion by September this year.
"Signs of stabilising steel demand sentiment in China further contribute to positive market outlooks," it added.
Recent initiatives by the Chinese government to address the property market crisis, including a renminbi 300 billion facility for affordable housing support, elimination of minimum mortgage rates, and reduced down-payments for first-time homebuyers, indicate a potential turnaround in steel demand sentiment.
While these measures may not entirely resolve China's property challenges, they signify a pivotal shift in sentiment, particularly critical as the property sector accounts for about 30 per cent of domestic steel consumption in China.
HLIB kept its "Buy" call on Hiap Teck with a higher target price of 41 sen from 38 sen previously.