Price (29 Aug 2013) RM0.91
Target Price RM0.83
Outlook for steel demand and prices still murky
_ Weak steel prices and higher cost of raw materials resulted in Steel Division’s operational losses for 12MFY13.
_ 12MFY13 net profit was below ours and consensus expectations. Dividend payment of 1 sen proposed in 4QFY13.
_ Maintain NEUTRAL with revised TP of RM0.83 (previously RM1.00) based on SOP valuation.
Weaker net profit for 4QFY13 than that in 3QFY13. Lion Industries revenue rose by 2%qoq to RM1.23b in 3QFY13 contributed by higher sales of its Steel and Building Materials Division. Nonetheless, the Group’s profit from operations (EBIT) for 4QFY13 dropped 101%qoq to a loss of RM0.4m underpinned by lower profit margin. We believe that the drop in margin was contributed by high cost of raw materials.
Cumulative net profit position for the Group reported in the earlier quarter’s result was short lived. 12MFY13 net profit returned to red with a PATAMI of -RM35.1m (-8%yoy). It missed ours and consensus expectation of a net profit of RM19.7m and RM60.2m respectively. For 12MFY13, Group revenue declined by 14%yoy to RM4.7b while EBIT was lower by 158%yoy to a loss of RM15.6m.
Steel division reported a loss from operations of RM33.2m vs. a profit of RM14.6m for 12MFY12. This was due to lower selling prices of steel products as well as higher cost of raw materials.
Contribution from associates and jointly controlled entity (Parkson Holdings and Lion Asiapac Limited) declined 21%yoy to RM93.7m for 12MFY13.
Industry outlook remains cloudy. Its Steel Division continues to face the challenge of weak steel prices as a result of global overcapacity situation and sluggish demand. Meanwhile raw material prices are expected to remain volatile due to global uncertainties. China’s economic situation although has been seen stabilising with its recent data but sustainability of that is yet to be certain.
Fiscal tightening may slowdown roll out of projects to support domestic demand of steel products. The Group remains hopeful of the local projects rolling out to support the demand of steel and that anti dumping measures be implemented effectively by Government. However, we believe that due to slower global economic growth coupled with the need for fiscal tightening locally to reduce fiscal deficits and debt to GDP, roll out of projects especially ETP projects is likely to be slower. This is likely to impact demand of steel products locally in the near term. Also, China’s production of steel products is still high and this could still lead to dumping of cheaper prices of steel products in ASEAN countries.
Forecasts revised downward. We lower our FY14 earnings estimate by 49.5% to RM62.9m by taking into account higher cost of sales and our imputation of lower selling prices for steel products.
Maintain NEUTRAL. We revise our TP to RM0.83 (previously RM1.00) based on sum-of-parts valuation. The lower TP was due to a drop in market capitalization of its subsidiary company and associates based on current share prices and our revised FY14 earnings of its Steel Division
Publish date: 30/08/13