Lion Industries - To rebound in 2HFY13F BUY

- We reaffirm our BUY rating on Lion Industries Corporation (Lion), but slash our fair value for the stock to RM1.35/share (from RM1.65/share previously) after pegging a 10% discount to our FD SOP of RM1.50/share.

- Lion reported RM26mil in net loss for 1QFY13F on the back of RM1.1bil revenue (-15% YoY, -20% QoQ). Losses were attributable to operating losses of RM16mil at the steel division due to combination of:-

- (1) Weak volume – We gather demand has not really picked up despite the numerous ongoing key infrastructure projects, e.g. KV MRT and LRT extension works. Weak demand was also partly due to fewer working days during the festive celebrations in August.

- (2) Subdued selling prices due to weak global market – We understand the average steel bar price for the quarter was circa RM2,200/tonne vis-a-vis RM2,360/tonne in the preceding quarter, and 

- (3) High input costs – despite the weak global demand, raw material costs are somewhat sticky downwards whereby scrap costs are still trading at about US$380/tonne to US$390/tonne, coming off from the recent high of US$400/tonne.  

- We suspect earnings will continue to be weak in the next quarter but may recover in 2HFY13F on the back of an expected acceleration in demand for steel as restocking activities pick up. 

- Just to be sure, China has recently committed some US$150bil for its infrastructure spending to comprise 60 projects. In fact, Baosteel had recently indicated  it will raise prices of its major steel products in December – the first after 9 months. 

- We are estimating FY13F earnings of RM31mil on the back of RM5.6bil in revenue. 

- There is further upside as there are other key infrastructure projects such as the West Coast Expressway, KLIFD, RRIM re-development, and Gemas-JB  double tracking that will provide a massive boost to steel demand in the mid- to long-term.

- From a valuation standpoint, Lion is trading at a depressed FY13F P/B of 0.2x which is 1 standard deviation below its P/BV historical mean. The company may trade within range in the near term given the sentiment but positive news from the Chinese market would push its valuations up.  

Source: AmeSecurities