KUALA LUMPUR: Hong Leong Investment Bank (HLIB) expects Hiap Teck Venture Bhd to be due for a re-rating on the back of improving sector earnings prospects.

       In the research firm's inaugural coverage of the counter, it said China is on a decarbonisation drive by swapping existing steel capacities from the Blast Furnace-Basic Oxygen Furnace (BF-BOF) route to the Electric Arc Furnace route (EAF)

       It said the initiative will likely result in more stable profitability among steel players in the region.

       Meanwhile, HLIB also sees multi-year growth potential in 27.3%-owned Eastern Steel Sdn Bhd's earnings as it continues to enhance its cost efficiencies and undergoes a major capacity expansion at the blast furnace segment and venture into the production of the hot rolled coil segment.

       "HTVB’s net debt and net gearing ratio have been on a declining trend since FY19, mainly attributed to its improving financial performance and absence of major capex commitment.

       "It is also one of the lowest geared compared to its peers in Malaysia. Moving forward, we project HTVB’s net gearing to trend down further in coming years (on the back of stable operating cash flow and absence of major capex spending), which will like result in more generous dividend payout," said HLIB.

       Hiap Teck Venture's undemanding valuation could be owing to a negative perception of the steel sector and the lack of research coverage on the stock, it added.

       "We project HTVB’s core net profit in FY22-24 to expand by 3-year CAGR of 6.5%, underpinned by sustained earnings contribution from trading and manufacturing segments, and higher earnings contribution from ESSB, arising from higher production volume and better cost efficiencies (following the completion of coke oven plant in phases)," said the research firm.

       It initiated coverage with a "buy" rating and target price of 63 sen.