Businessman and tycoon Datuk Law Tien Seng has emerged as the second-largest shareholder in steel manufacturer Hiap Teck Venture Bhd with the acquisition of 55 million shares, or a 17.08% equity stake, in the company.

While details on the acquisition price were not revealed, off-market data shows that Hiap Teck shares were purchased in direct deals on April 8 in two blocks of 29.6 million shares and 25.4 million shares each at RM1.60 per share. This values the total stake at RM88 million. The RM1.60 price tag was a 9% premium over the day’s closing price of RM1.47. The counter shed one sen to RM1.41 last Friday.

The Hiap Teck shares bought by Law are believed to have came from its managing director and major shareholder Kua Hock Lai. With the sale on April 8, Kua reduced his shareholding in the company to 18.42% from 35.5% .

Little is known about Law, but he is no stranger to the mining and metals industry. He was the former deputy chairman and shareholder of Australian iron ore mining outfit Midwest Corp Ltd, with a 12% equity stake. Law cashed out his stake in Midwest to China’s Sinosteel Corp in 2008 after a drawn out shareholder tussle to own the company. The sale of his stake put him on the Forbes list of the top 40 richest Malaysians in 2008. He was ranked 36 in 2009 with an estimated wealth of US$105 million (RM334.9 million).

Interestingly, Law’s buying into Hiap Teck comes some three and a half months after the company’s proposed acquisition of a 55% stake in Eastern Steel Sdn Bhd for RM110 million in cash (1.4 times price-to-book value). Law is one of the directors of Eastern Steel and holds a 90.74% stake in the company.

Hiap Teck had said the acquisition of a majority stake in Eastern Steel would enable it to become an integrated player with both upstream and downstream operations, thus allowing it to better manage its profit margins and strengthen its position within the local steel industry.

According to filings with Bursa Malaysia, Hiap Teck would be purchasing 50.4% of Law’s stake at RM91.5 million. Law’s original cost of investment was stated as RM900.

The purchase price was arrived at on a willing buyer-willing seller basis based on the audited net assets of Eastern Steel as at July 31, 2009 of RM143.94 million and discounted cash flow valuation of a proposed blast furnace plant project.

OSK Research says, while the valuation appears to be on the high side, the acquisition comes with a proposed blast furnace project, some 600 acres of land in Teluk Kalung Estate in Kemaman, Terengganu and other tax incentives. The plant is expected to require a capital investment of approximately RM750 million to RM850 million.

Eastern Steel will be tying up with China’s Jinan Iron & Steel Group Corp to set up the blast furnace plant. Jinan Iron will provide knowledge and technology transfer for a minimum period of three years. It is also worth noting that Law is reportedly an adviser at Jinan Iron & Steel Corp. Additionally, the Terengganu Economic Planning Unit has also approved the alienation of another 1,200 acres of land in Kemaman in two phases to Eastern Steel.

Analysts say Hiap Teck is a good avenue for Law to move downstream in the local steel business. OSK notes that its 55%-owned Eastern Steel will be undertaking the new upstream steel business.

Hiap Teck’s prospects seem to be looking up, with analysts generally bullish on the outlook of steel prices for the next six months on the back of rising scrap metal costs. Escalating steel prices are a good indication of improving buying sentiment. OSK Research also notes that the mismatch between inventory stocks bought earlier against higher selling prices may expand the company’s margin.

Hiap Teck has indeed made a better showing in the last reporting season. The company posted net profit of RM3.9 million for its 2Q2010 ended Jan 31,  against a net loss of RM7.2 million in the previous corresponding quarter, as market conditions improved along with the economic recovery. However, revenue for the quarter dropped 6% to RM251.4 million from RM267.3 million previously.

OSK downgraded Hiap Teck to a “neutral” on concerns that Hiap Teck’s current gross debt of RM393.3 million, cash of RM171.2 million and shareholders’ funds totalling RM600.5 million, translates to a net gearing of 37%. With RM110 million to be spent on the 55% stake and additional capex of RM750 million to RM850 million for the blast furnace, Hiap Teck’s total outlay could amount to at least RM860 million, which OSK says would cause its debt to spiral to RM1143.3 million. This would inflate net gearing to 180.2%.

“We are generally upbeat on the short-term financial performance of Hiap Teck, but are concerned over the company’s high gearing in the medium term,” OSK says.

Analysts have also expressed concern that Law’s entry into Hiap Teck could be seen as a possible exit plan for Kua. It is learnt that Law’s management team has already come into Hiap Teck. Prior to the sale of the stake to Law, Kua had disposed of some 10 million shares last February, which is equivalent to a 3% stake,  via a direct transaction. Kua is currently still the largest shareholder in Hiap Teck with a stake of 18.05%.

This article appeared in Corporate page of The Edge Malaysia, Issue 802, April 19-25, 2010