We remain calm despite expecting Lion Industries (LICB) to be in the red at the start of FY13, weighed down by paper write-downs. Although its steel division is unlikely to escape the price/cost mismatch, the group may report a small core profit, thanks to steady contribution from its associate Parkson, as well as the St. Mary project. Moving forward, we expect its non-core businesses to continue to support the group results as the improvements in its steel division may not be significant. The potentially weaker start prompts us to trim our FY13 estimates, which accordingly lowers our FV to RM1.14. Maintain NEUTRAL.
Another paper write-down likely. We expect LICB to report a net loss at the start of FY13, mainly attributable to another paper write-down as the market value of its stake in Lion Corporation shrinks further in 1QFY13. However, we project a small profit from its business operation, thanks to the steady contribution from its retail associate, Parkson, and the tail-end profit recognition from the St. Mary Residence JV project. We expect its core steel division to be in the red, like its peers, due to the mismatch between the stillhigh raw materials cost and a greater drop in steel prices on regular delivery time lag.
Outlook “Steel” cloudy. Meanwhile, we see limited recovery in local steel prices despite a rebound in international steel prices over the past few weeks, in view of the fact that domestic long steel product prices have held steadier than international prices in the recent down cycle. The recent implementation of provisional measures in the steel industry is positive for major local wire rods producers such as LICB. The provisional anti-dumping duty, ranging from 0% to 33.62%, may deter non-genuine imports of wire rods, but the overall impact may be limited as imports have subsided since the petition was submitted to the Government. These aside, management is keeping mum on the new natural gas tariff for its hot briquetted iron (HBI) plant in Labuan as the previous long-term contract price expired in October 2012 and it has signed a confidential agreement with a supplier. Hence, we are raising LICB’s gas cost by 50% to USD4.50 per mmBtu (million metric British thermal units) as its previous tariff was about half the current tariff charged in Peninsular Malaysia.
Continued support from non-core businesses. We also expect sturdy contribution from retailer Parkson, especially in 2Q and 3Q, due to the festivities. Meanwhile, building material trader Lion Forest and the JV for the St. Mary Residences project are also likely to generate constant group earnings, albeit minimal. Incorporating these, we are cutting our FY13 earnings estimate by 26.8% on a weaker start for the year but maintaining our
FY14 numbers. As local steel counters are trading at a premium to their regional peers, we maintain NEUTRAL call on LICB, with our fair value revised slightly lower to RM1.14 as a result of the pared down FY13 estimates.
Source: OSK
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