Tan Sri Albert Cheng’s recent move to raise his personal stake in the company prompts us to revisit Lion Industries despite the currently pallid steel market, at least till the next General Election is held. We are drawn to the stock’s relatively undemanding 0.26x FY12 BV, while its share price is also lower than the entire market value of the listed companies it owns. The on-going move to dispose of part of its steel assets has been long-drawn, and we are unsure if the executive share purchase has been stirred up by the M&A, but any deal would certainty unlock the value of its steel unit, which has been discounted by the market so far. Thus, maintain Trading BUY on Lion Industries, with a fair value of RM1.41, derived from 0.32x FY12 P/BV, or -0.5 standard deviation of its historical trading range.
Insider share purchase. Bursa Malaysia filings show that Lion Industries Managing Director Tan Sri Albert Cheng Yong Kim has been accumulating the company’s shares since March 2012. This has raised his direct interest in Lion to close to 1%. Most of the transactions were at RM1.39 to RM1.41 a share, which was way higher than the last closing price. We find insider buying reassuring as this reflects that executives believe their company’s shares are undervalued, or its future is brighter than others realize.
It’s still all gloom. We expect the implementation of “mega” projects under the Economic Transformation Programme (ETP) to be prolonged, at least until the polls are held. However, we are optimistic that the company’s upcoming results will be much better, especially since steel price was higher q-o-q vis-à-vis an average material cost that may be marginally lower due to the availability of cheaper scrap metal. We also see an earnings surge at its Hot Briquetted Iron (HBI) plant, which returned to normal from the end of April 2012. Meanwhile, Lion Forest is still generating a small profit from its trading business. All these should more than compensate for the seasonally lower quarter at Parkson, although we remain cautious on its medium term outlook.
Cheap valuation or M&A? Given the fact that steel industry outlook remains challenging in the medium term, Tan Sri Albert’s purchase may have been motivated by the group’s on-going exercise to dispose of a portion of its interest in its steel unit. Although the process has been long-drawn and discussions are likely to be lengthy, especially with fresh economic concerns in Europe, we still cannot discount the possibility of there being buyers who may be keen to seek exposure in Malaysia or South-East Asia’s steel markets. As for its basic valuation, the current share price is certainly undemanding at only at 0.26x of FY12 BV. Furthermore, the market value of the listed units owned by the company at RM1.65 also implies that the market has not ascribed any value to its steel business.
Source: OSK
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