PETALING JAYA: Local steel stocks have largely been perceived negatively by investors because of their volatile historical earnings trend because of China’s overcapacity issue.

       However, improving sector earnings thanks to the Chinese government’s initiative to transform the country’s steel sector, is expected to augur well for players in the sector including Hiap Teck Venture Bhd.

       Hong Leong Investment Bank (HLIB) Research said the company could ride on the improving sector outlook with China’s ongoing decarbonisation drive that will likely result in more stable profitability among steel players in the region.

       In an initiation report, the research firm said that the stock was trading on undemanding valuation and could be due for a re-rating.

       HLIB Research expected multi-year growth potential in Hiap Teck’s 27.3%-owned Eastern Steel Sdn Bhd’s (ESSB) 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.

       It noted that Hiap Teck’s net debt and net gearing ratio have been on a declining trend since financial year 2019 (FY19) due to the improving financial performance and absence of major capital expenditure commitment.

       “It is also one of the lowest geared compared with its peers in Malaysia. Moving forward, we project Hiap Teck’s net gearing to trend down further on the back of stable operating cash flow, which will likely result in a more generous dividend payout,” the research house added.

       HLIB Research also anticipated an asset unlocking exercise with the relocation of Hiap Teck’s warehouses to a new location, which is expected in two to three years.

       This will allow the company to crystallise the value of the landbank where part of its warehouses are situated, given the sharp appreciation in land value over the years, it added.

       “We project Hiap Teck’s core net profit in FY22-24 to expand by a three-year compound annual growth rate of 6.5%, underpinned by sustained earnings contribution from trading and manufacturing segments, and higher earnings contribution from ESSB,” the research house said.

       HLIB Research began coverage on the stock with a “buy” rating and target price of 63 sen.