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
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