NEUTRALFAIR VALUE: MYR1.15
LICB’s FY12 core profit of RM85m slightly beat estimates, owing to a timely q-o-q rise in steel price and cheaper scrap metal. Its Labuan iron-making plant also resumed operations, further contributing to the steel division’s revenue. The company also stands to benefit if the Government imposes a duty on steel rods, following a probe on alleged dumping. We remain cautious for the near term, as steel prices are dropping again, which will delay LICB’s planned disposal of some of its steel assets. The massive paper write-down in 4Q is also likely to disappoint. Thus, we stick to our NEUTRAL call, with FV tweaked slightly to RM1.15 as we roll over our valuation to FY13 and fine-tune FY12’s numbers based on the latest results. We are keeping our parameter of 0.26x BV, or a -1 std deviation of its historical trading range.
Possibly a short-lived revival. LICB posted a core net profit of RM42.7m in 4Q, bringing the full year’s operating earnings to RM85m. However, the company made a paper write-down of RM121.4m in 4Q after the market value of its stake in Lion Corporation shrunk in the past few months, taking its reported bottomline into the red. While the improved operating performance was within expectations, the quantum was slightly ahead of our and consensus estimates. The improved operating numbers came from its steel division, as selling prices were higher q-o-q even as the average material cost may have dipped while scrap metal became cheaper. We also saw a surge in earnings from its hot briquetted iron (HBI) plant as it resumed normal operations in 4Q. All these have more than compensated for the lower contribution from LICB’s 17%-owned Parkson, which had a seasonally slow quarter.
Holding on to hopes. We suspect that the market still has high hopes that the Government’s Economic Transformation Programme (ETP)’s rollout of projects will spur the demand for steel, despite the inherent risks in its actual implementation. Furthermore, the focus may have shifted to when the next General Election will be held, as speculation is rife over the timing of the next polling period. As the market is likely to be a let-down in 2HCY12 given the fact that steel prices are once again heading south, we expect the momentum on construction works to pick up in 2013 and therefore retain our original estimates. That aside, the weakening near-term outlook for the steel sector may once again hinder the group’s efforts to hive off part of its steel assets, at least until the government offers more clarity on its policy on the local steel industry.
All eyes on dumping probe. The International Trade and Industry Ministry (MITI) initiated preliminary investigations into imports of steel wire rods after receiving a petition about alleged dumping from domestic producers. If the final determination is affirmative, the Government might impose an anti-dumping duty at a rate that would rectify the situation. While we think MITI may take at least another month or so before reaching a final decision, the imposition of any anti-dumping duty may bring cheer to the company, by virtue of it being one of the key wire rods producers in the country. Meanwhile, we prefer to keep our NEUTRAL stance on LICB; its paper write-down is still a negative surprise to the market as the amount is deemed as massive for the group. Nonetheless, our FV is tweaked down slightly to RM1.15 as we update the latest result into our model and roll over our valuation of 0.26x BV, or -0.5 standard deviation of its historical trading range, to FY13.
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