We maintain our Neutral call on the stock and fair value of RM0.44. We believed the outlook for the local steel pipe maker is still weak due to subdued demand for steel pipes from water and construction projects. HTVB also continue to face a stiff competition from cheap import for its pipes as well as for its API pipes from foreign players. 

 

Below expectations. 1HFY13 net profit came in way below expectations at only 17% of our full-year forecast and market consensus. The key variance to our forecast came largely from lower-than- selling prices, coupled with higher-thanexpected production cost. 1HFY07/13 net profit plunged 71% yoy largely due to lower selling prices. 

 

Net profit rebound QoQ but outlook remains weak. HTVB net profit grew 84% qoq driven by higher sales volume and higher selling prices. However, we still expect domestic demand for steel pipes to remain subdued as key water-related projects are unlikely to get off the ground in a major way in the absence of any significant progress being made in relation to the restructuring of the water sector in Selangor. While the RM300m allocation for water pipe replacement announced in Budget 2013 will give the sector a lift, it is not significant enough to make a major difference to the manufacturers. No doubt large-scale public infrastructure projects such as the LRT line extension and Klang Valley MRT will stimulate demand for smaller-diameter pipes. However, the demand will only come during latter stages of implementation. Adding salt to the wound are cheap imports in the market that 

have depressed selling prices and margins. 

 

Risks. The risks include: (1) No progress in the water sector restructuring in the Klang Valley; (2) Stiff competition in the global API pipe market; and (3) Rising input costs. 

 

Forecasts. We are cutting FY13-14 net profit forecasts by 9-22%, having reduced our selling prices assumption for the manufacturing division. 

 

Maintains Neutral. Our fair value is remain unchanged at RM0.44 based on 0.35x book value of RM1.25, at a discount to its historical average of 0.5x during downcycles to reflect the continued weak outlook for domestic steel pipe sales and 

API pipe exports.

 

Source: RHB