We are maintaining our BUY
recommendation on Lion Industries Corp (LICB) with our fair value lowered to RM1.90/share, based on a 10% discount to our
revised sum-of-parts value of RM2.06/share.
LICB reported 1HFY12 earnings of RM35mil (-72% YoY) after
generating only RM7mil (-75% QoQ) in 2QFY12. This was despite recording a
healthy YoY turnover growth of 36%.
This came below our and street estimates, covering only 18%
and 29% of the respective full-year forecasts. The figures show that while
steel demand was decent, earnings were affected by high feedstock costs and
also subdued selling prices of steel products.
We have therefore slashed our earnings forecast for FY12F by
63% to RM69mil as its earnings will be impacted by the sustained high input
costs and weak selling prices for its products – underpinned by supply
disruption and economic turmoil in Europe, coupled with weaker demand in
China.
However, we are expecting a strong surge in earnings – RM190mil
and RM294mil for FY13F and FY14F, respectively, to be underpinned by demand
recovery and stronger pricing trends. We have assumed the average selling price
to be between RM2,300/tonne and RM2,400/tonne. Its 17%-associate Parkson
Holdings will be a key contributor to income as well – accounting for 40% of
70% of pre-tax profit in FY13F and FY14F. LICB should be a direct beneficiary
of the acceleration of key infrastructure projects in Malaysia, particularly
the Klang Valley MRT. Our strong conviction is supported by the group’s largest
market share in the supply of local steel bar (32%) and about 40% in the wire
rod segment.
Our checks revealed that some 500,000 tonnes of steel products
will be required for the SBK line alone. This accounts for about 9% of the
annual rolling capacity of the five major steel millers in Malaysia.
There is further upside as there are other key infrastructure
projects such as the West Coast Expressway, KLIFD, RRIM re-development, and
Gemas-JB double tracking that will provide a massive boost to steel demand in
the mid-term.
Another plus point is that LICB is currently trading at an attractive
CY13F PE of 5x.
Source: AmeSecurities
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