KUCHING: Hiap Teck Venture Bhd’s (Hiap Teck) acquisition of 55 per cent stake in a dormant company, Eastern Steel Sdn Bhd (Eastern Steel) for RM110 million cash does not seem to add more value to the company, at least in the medium term.OSK Research Sdn Bhd (OSK Research) in a research report cited that the acquisition of Eastern Steel’s business which gained access to the latter’s planned blast furnace lacked synergy between the two companies’ operations.
It noted that Eastern Steel, being in upstream operations, converts iron ore to slabs as compared with Hiap Teck, which as part of its downstream activities, converts hot rolled coils (HRC) to pipes and other downstream products. Therefore, a third party is required to convert the slabs to HRC.
Meanwhile, Eastern Steel owns 240 hectares of land in Teluk Kalung, Kemaman, Terengganu and has gained the approval from the Malaysian Industrial Development Authority (Mida) and the Ministry of International Trade and Industry (Miti) to build a blast furnace plant.
It also has an arrangement whereby China’s Jinan Iron & Steel Group Corporation will provide Eastern Steel with the knowledge and technology to develop the project for at least three years.
The plant’s first phase comprised of a 530 cubic metre blast furnace with a slab caster will have an annual production capacity of up to 700,000 tonnes. Hiap Teck hoped to finalise the purchase in the third quarter of 2010 and expects the plant to start generating income in 2012.
On the other hand, OSK Research observed that a subsidiary of China’s Jinan, Vibrant Holdings Sdn Bhd, operates a plate mill in Kemaman in Terengganu. The research firm was unsure as to whether operating a mini blast furnace as proposed would be viable in the current business environment.
According to the research firm, the blast furnace project may have an estimated total cost of RM3 billion although it was reported that capital expenditure for the project may be around RM750 million to RM850 million. It said that the reported sum may represent Phase One of the entire project.
As for the funding of the project, the research firm pointed out that Hiap Teck might partly fund the project through a rights issue and borrowings as it could stretch the company’s balance sheet.
It observed that Hiap Teck’s current gross debt amounted to RM393.3 million with cash and equivalents amounting to RM171.2 million as well as shareholder funds totalling RM600.5 million, for a net gearing level of 37 per cent.
The research firm pointed out that with RM110 million to be spent to acquire a 55 per cent stake and an additional RM800 million capital expenditure for the blast furnace, Hiap Teck total outlay could balloon to RM910 million.
This would cause its debts to soar to RM1.3 billion on its balance sheet (excluding minority interest). At the same time, this would also increase its net gearing to 188.5 per cent.
After factoring an effective 55 per cent share of the additional capital expenditure, this will lift its net gearing to 120.3 per cent.
Hence, OSK Research placed the rating of Hiap Teck under review pending more release of information regarding the development of the blast furnace project.