Tuesday 28 February 2012

LIONIND (FV RM1.78 - TRADING BUY) 1HFY12 Results Review: Profit Down, But Still Richer


Thanks to Parkson’s contribution, Lion Industries managed to stay in the black in 2QFY12. However, its steel division suffered losses, largely due to the mismatch of high raw material costs and lower steel prices. The award of ETP projects may have gained  pace  but the actual works could take  time. This, coupled with the delayed recovery of steel prices, prompt us to  cut  our earnings  estimates. However,  we are keeping our Trading BUY call, with  our  FV  cut to RM1.78, on anticipation of steel  prices rebounding next month may spur  interest in steel stocks.  One excitement is  the litigation settlement by 73%-owned Lion Forest,which may lead to a possible dividend as it will unlock up to RM250m in cash.

Below expectations. After eliminating a few lumpy items, Lion Industries’ 2QFY12 core net profit came in at RM10.8m but its 1H earnings disappointed us and street estimates, representing only 22.8% of our full-year  numbers. The festive season that boosted Parkson’s contribution, however, failed to mitigate the huge loss in the steel division. We had earlier anticipated contributions from its iron making business to cushion the losses from steelmaking in 2Q. However, the sharp plunge in both iron ore and scrap prices during that period gave rise to a negative mismatch between lower selling prices and high raw material costs (time lag impact), which eroded its iron making profit.

Improving 2H outlook? Although the implementation of “mega” projects under the Economic Transformation Programme (ETP) has been slow, the  momentum of  project awards has been picking up. Nonetheless, it may take a while for actual works to begin and eventually raise the demand for physical steel. This aside, steel prices have remained lacklustre and  defied  our earlier expectations of a possible recovery in February. We suspect that prices may turn up in March, with China expected to bump up construction activities as it enters the spring season. With the maintenance of its Hot Briquetted Iron (HBI) plant scheduled for next month,  the group’s  3Q numbers are not expected to look pretty. Thus, we feel compelled to slash our FY12 and FY13 numbers by 40.4% and 34.8% respectively.     

Maintain Trading BUY. Although let down by the long-standing delay in Lion Industries’ steel asset disposal, any sale  would immediately unlock  the value of its  assets. The strong correlation between steel and share prices also suggests  that steel price may escalate and spur  interest in steel counters. We  are  also excited over the litigation settlement by its subsidiary, which  may unlock up to RM250m  for  73%-owned Lion Forest, leading to a possible dividend being streamed up. As such, we keep our Trading BUY call on Lion Industries, with its FV trimmed to RM1.78 following our earnings cut. We value the stock at 0.4x FY12 P/BV, or the mean of its historical trading range.

Source: OSK188

No comments:

Post a Comment