Lion Industries Corp: Swapping From One Hand to The Other

THE BUZZ

Lion Industries Corporation’s (LICB) major shareholder and sister company, Lion Corp (LCB), and its wholly-owned subsidiary, PMB Jaya SB, have entered into a conditional share sale agreement to dispose of 181.9m ordinary shares of RM1.00 each in LICB, representing approximately 25.34% equity interest in the company (excluding treasury shares), to Tan Sri Cheng Heng Jem (TSWC) and Dynamic Horizon Holdings Ltd for a total cash consideration of RM254.5m, or approximately RM1.40 per LICB share. Separately, Bright Steel SB (BSSB), a wholly-owned subsidiary of LCB, has also entered into a conditional share sale agreement to dispose of 7.5m LICB shares, representing approximately 1.04% equity interest in LICB (excluding treasury shares), to TSWC for a cash consideration of RM10.5m, or approximately RM1.40 per LICB share.  (Bursa Malaysia)

OUR TAKE

Briefly on the transaction. The proposed disposal of LICB shares by LCB is to meet LCB Group’s debt repayment obligations and to partially reduce LCB Group’s debt obligations. Following the transaction, LCB Group’s gearing level is expected to shrink from its current 5.8x to 2.45x. BSSB’s proposed disposal, on the other hand, will provide funds for the company’s working capital. Meanwhile, the shareholders of Dynamic Horizon are Tan Sri Cheng Yong Kim (TSAC) (86%) and Puan Sri Chan Chau Ha (14%). This is the second time LCB has disposed of its interest in LICB to TSWC; the first was in September 2009 when its subsidiary Megasteel sold the pledged LICB shares to TSWC and utilised the proceeds to repay the principal and interest on Megasteel’s term loan.

Figure 1: The details of the transaction

LCB Vendors Purchasers Sale LICB Shares (No of shares) % paid-up capital of LICB (%) Disposal Consideration (RM) LCB TSWC 106,104,282 14.78 148,505,000 LCB Dynamic Horizon 74,472,627 10.38 104,233,000 PMB Jaya TSWC 1,279,900 0.18 1,791,000 Total LCB and PMB Jaya 181,856,809 25.34 254,529,000 BSSB TSWC 7,481,316 1.04 10,471,000 Grand Total 189,338,125 26.38 265,000,000 Source: Bursa Malaysia

Net positive to sentiment. We are generally net positive on the latest shareholdings swap despite TSWC and TSAC being common major shareholders of the Lion Group of companies. The LICB stake disposed by LCB would remain within the control of TSWC and his family. However, we think the transactions reflect the willingness of TSWC and TSAC to take up the LICB stakes in their personal capacities and thus can be viewed positively as indications of the duo’s confidence in the company’s prospects and that they both expect upside in LICB’s share price from the present level. Although these are related party transactions and may thus be viewed negatively by some investors from the corporate governance point of view, we view such acquisitions as among the better options to prevent eventual dumping of LICB shares in the open market by LCB’s lenders in the event of default, which would then dampen the share’s price performance. Furthermore, the disposal arrived on a willing buyer-willing seller basis represented a 52.17% premium to the stock’s last close on 30 Nov 2012 and 25% higher than its six months volume weighted average market price (VWAP).

Figure 2: Basis of arriving at the disposal consideration

Market Price Premium (RM) (RM) (%) Closing price as at 30 November 2012 0.92 0.48 52.17 5-day VWAP 0.94 0.46 48.94 6-month VWAP 1.12 0.28 25.00 Source: Bursa Malaysia

Upgrade to Trading BUY. Besides the possible positive sentiment emanating from these transactions, we also view LICB’s share price as being undemanding, as it is currently trading at only 0.22x FY13 BV/share. Based on our target price of RM1.14, derived from 0.26x FY13 BV, or a -1 std deviation of its historical trading range, the stock now offers a decent upside potential of 20%. Thus, we upgrade LICB recommendation to Trading BUY from NEUTRAL.

Source: OSK