Hiap Teck Venture Bhd (Dec 6, 90 sen)
Upgrade to trading buy at 88 sen with revised fair value of RM1.17 (from 80 sen): A Bernama report yesterday said Terengganu Mentri Besar Datuk Seri Ahmad Said announced that Eastern Steel Sdn Bhd will be awarded a 243ha area in Bukit Besi and can mine for Grade A iron ore until it is depleted. He was performing the ground-breaking ceremony for Eastern Steel’s blast furnace in Kemaman, Terengganu. Eastern Steel is 55% owned by Hiap Teck, 40% by Shougang via Orient Steel, and 5% by Chinaco.
We laud the announcement, which confirms our earlier speculation that the company may win a share of the mining area and our house view that the iron ore reserves in Terengganu are now up for grabs.
During the ground-breaking ceremony, Ahmad said the iron ore mining area in Bukit Besi is divided into four areas of 243ha each. Besides Eastern Steel, Perwaja Steel Sdn Bhd has also been allotted one area, while the remaining two will be given to “interested investors” who need to build a steel mill.
The iron ore reserves in Bukit Besi are estimated at 45 million to 50 million tonnes while Kemaman has an estimated 25 million tonnes.
This is actually lower than our earlier estimates. But we are not too concerned about the lower- than-expected reserves as: (i) we did not incorporate any iron ore discounted cash flow (DCF) value in our previous valuation; (ii) the estimates were based on a simple geological survey and we believe more reserves may be discovered when mining begins and further geology surveys are carried out; and (iii) according to our sources, the actual iron ore reserves in Bukit Besi are higher than that reported, based on the output from some private mines which are currently producing about 800,000 tonnes of iron ore per month.
Nonetheless, we still prefer to take a relook at our iron ore DCF model by modifying our assumptions to: (i) Eastern Steel mining 500,000 tonnes of iron ore in 2012, increasing to one million tonnes per year starting from 2013 up to 2031; and (ii) assuming that iron ore would be selling at US$120 per tonne in 2012, declining by US$5 per tonne every year and stabilising at US$100 per tonne from 2016 to 2031. Hiap Teck’s 55% stake in Eastern Steel will translate into about RM653.7 million in DCF valuation (previously RM708 million).
We note that Ahmad has changed his tone in the announcement when saying that the 243ha area in Bukit Besi will be “given” to Eastern Steel and Perwaja.
This we think is far more promising than his remark four months ago that the state government was “ready to consent” while attending the ground breaking of Perwaja’s pelletisation plant. As such, we think that both Eastern Steel and Perwaja are one step closer to inking their iron ore concession agreements.
No doubt the iron ore concession announcement is exciting but we prefer to remain cautious and prudent since an official agreement has yet to be signed between Eastern Steel and the state government, although the mentri besar’s tone provides more assurance.
Nevertheless, we think it justified to incorporate 20% into our blue-sky iron ore DCF value, or 37 sen per share, into our valuation. That said, any subsequent progress will prompt us to boost the DCF value in our valuation.
The mentri besar indicated that two more 243ha areas in Bukit Besi are awaiting interested investors, but these come with the condition that they must invest in Kemaman and set up their plants there.
As for now, there has yet to be indication of interest from any steel mill. As such, there may be a possibility that both Eastern Steel and Perwaja may get to share the remaining areas, which will boost their iron ore income stream.
This aside, the two companies may also win the concession to mine iron ore in Kemaman, where reserves are estimated at some 25 million tonnes, assuming there are no takers. However, this is merely speculation on our part and too early to arrive at a valuation.
Separately, Hiap Teck said in a statement that the company is confident that the blast furnace will contribute as much as 50% of group profit in 2014.
Phase 1 of the project, scheduled to be completed by mid-2013, is capable of producing 700,000 tonnes per year (tpy) of steel slabs and 350,000 tpy of coke.
Construction on phase 2 will start after phase 1 becomes operational and is estimated to involve an investment of RM1.05 billion. On completion of phase 2 in 10 months, Eastern Steel will be capable of producing 1.5 million tpy of steel slabs and 700,000 tpy of coke. However, we prefer to monitor this before incorporating any earnings from the blast furnace.
We will now value Hiap Teck by incorporating 20% of the iron ore DCF value of 37 sen per share, on top of our base fair value (FV) of 80 sen.
We maintain our base valuation at -1 standard deviation, which is still lower than our general valuation of -0.5 standard deviation for the steel stocks in our universe. This is mainly attributed to the weaker sentiment arising from the cash call exercise.
Nevertheless, as the new FV of RM1.17 provides a decent 33% upside from its last close, this prompts us to upgrade our recommendation from “neutral” to “trading buy”. — OSK Research, Dec 6
This article appeared in The Edge Financial Daily, December 7, 2011.
Upgrade to trading buy at 88 sen with revised fair value of RM1.17 (from 80 sen): A Bernama report yesterday said Terengganu Mentri Besar Datuk Seri Ahmad Said announced that Eastern Steel Sdn Bhd will be awarded a 243ha area in Bukit Besi and can mine for Grade A iron ore until it is depleted. He was performing the ground-breaking ceremony for Eastern Steel’s blast furnace in Kemaman, Terengganu. Eastern Steel is 55% owned by Hiap Teck, 40% by Shougang via Orient Steel, and 5% by Chinaco.
We laud the announcement, which confirms our earlier speculation that the company may win a share of the mining area and our house view that the iron ore reserves in Terengganu are now up for grabs.
During the ground-breaking ceremony, Ahmad said the iron ore mining area in Bukit Besi is divided into four areas of 243ha each. Besides Eastern Steel, Perwaja Steel Sdn Bhd has also been allotted one area, while the remaining two will be given to “interested investors” who need to build a steel mill.
The iron ore reserves in Bukit Besi are estimated at 45 million to 50 million tonnes while Kemaman has an estimated 25 million tonnes.
This is actually lower than our earlier estimates. But we are not too concerned about the lower- than-expected reserves as: (i) we did not incorporate any iron ore discounted cash flow (DCF) value in our previous valuation; (ii) the estimates were based on a simple geological survey and we believe more reserves may be discovered when mining begins and further geology surveys are carried out; and (iii) according to our sources, the actual iron ore reserves in Bukit Besi are higher than that reported, based on the output from some private mines which are currently producing about 800,000 tonnes of iron ore per month.
Nonetheless, we still prefer to take a relook at our iron ore DCF model by modifying our assumptions to: (i) Eastern Steel mining 500,000 tonnes of iron ore in 2012, increasing to one million tonnes per year starting from 2013 up to 2031; and (ii) assuming that iron ore would be selling at US$120 per tonne in 2012, declining by US$5 per tonne every year and stabilising at US$100 per tonne from 2016 to 2031. Hiap Teck’s 55% stake in Eastern Steel will translate into about RM653.7 million in DCF valuation (previously RM708 million).
We note that Ahmad has changed his tone in the announcement when saying that the 243ha area in Bukit Besi will be “given” to Eastern Steel and Perwaja.
This we think is far more promising than his remark four months ago that the state government was “ready to consent” while attending the ground breaking of Perwaja’s pelletisation plant. As such, we think that both Eastern Steel and Perwaja are one step closer to inking their iron ore concession agreements.
No doubt the iron ore concession announcement is exciting but we prefer to remain cautious and prudent since an official agreement has yet to be signed between Eastern Steel and the state government, although the mentri besar’s tone provides more assurance.
Nevertheless, we think it justified to incorporate 20% into our blue-sky iron ore DCF value, or 37 sen per share, into our valuation. That said, any subsequent progress will prompt us to boost the DCF value in our valuation.
The mentri besar indicated that two more 243ha areas in Bukit Besi are awaiting interested investors, but these come with the condition that they must invest in Kemaman and set up their plants there.
As for now, there has yet to be indication of interest from any steel mill. As such, there may be a possibility that both Eastern Steel and Perwaja may get to share the remaining areas, which will boost their iron ore income stream.
This aside, the two companies may also win the concession to mine iron ore in Kemaman, where reserves are estimated at some 25 million tonnes, assuming there are no takers. However, this is merely speculation on our part and too early to arrive at a valuation.
Separately, Hiap Teck said in a statement that the company is confident that the blast furnace will contribute as much as 50% of group profit in 2014.
Phase 1 of the project, scheduled to be completed by mid-2013, is capable of producing 700,000 tonnes per year (tpy) of steel slabs and 350,000 tpy of coke.
Construction on phase 2 will start after phase 1 becomes operational and is estimated to involve an investment of RM1.05 billion. On completion of phase 2 in 10 months, Eastern Steel will be capable of producing 1.5 million tpy of steel slabs and 700,000 tpy of coke. However, we prefer to monitor this before incorporating any earnings from the blast furnace.
We will now value Hiap Teck by incorporating 20% of the iron ore DCF value of 37 sen per share, on top of our base fair value (FV) of 80 sen.
We maintain our base valuation at -1 standard deviation, which is still lower than our general valuation of -0.5 standard deviation for the steel stocks in our universe. This is mainly attributed to the weaker sentiment arising from the cash call exercise.
Nevertheless, as the new FV of RM1.17 provides a decent 33% upside from its last close, this prompts us to upgrade our recommendation from “neutral” to “trading buy”. — OSK Research, Dec 6
This article appeared in The Edge Financial Daily, December 7, 2011.
