Target Price: MYR1.21
Recovery Expected Only After Small Bump
We turn cautious on Lion Industries (LLB) after a poor 4Q13 core profit of just MYR7.4m and surprise impairment on receivables at a related company. The impact of the festivities on steel demand and the MYR’s weakness suggest a slow start to FY14, with a pickup only in 2H. As we cut our estimates for FY14-15 and revise our valuation to 0.27x FY14F P/BV, or -0.5SD, our FV falls to MYR1.21. Downgrade to TRADING BUY.
• Another dismal year. Stripping off the non-recurring impairment loss of MYR81.9m, LLB made a mere MYR7.4m in core profit in 4QFY13, bringing its full-year core earnings to just 76%/90% of ours/consensus estimates respectively. The negative surprise came from its core steel division, which posted a core operating loss in 4Q due to lower steel prices. Contribution from 17%-owned Parkson (PKS MK; Neutral; FV: MYR3.60), which saw its 4Q headline profit plunge 59.3% q-o-q, failed to compensate for the losses at its steel division.
• FY14 recovery likely only in 2H. We expect a slow start for FY14. Local steel prices weakened since May before inching up after the Hari Raya holidays while the lull in construction activities during the fasting month dampened steel usage during that period. If the MYR weakens further in 2QFY14, we may trim our premium on local steel price, although this may be positive for exports. That said, we are heartened by the number of projects currently in progress vs those nearing completion or recently handed over. The Barisan Nasional (BN)’s renewed mandate in the May general election may help accelerate the implementation of projects and in turn boost demand for steel in 2H.
• Downgrade to TRADING BUY. We are disappointed with the poor 4QFY13 results. The impairment for inter-company receivables may turn away some investors, but Management has assured that the full amount could be recovered over a longer period. We slash our FY14/15 estimates by 20.6%/18.5% respectively on the back of the worse than expected results. Despite turning more cautious on LLB, the appeal of the stock’s distressed valuation - at merely 20% of its BV – prompts our Trading BUY recommendation. Our lower FV of MYR1.21 (vs MYR1.50) is derived from 0.27x FY14F P/BV, as we lower our P/BV valuation to - 0.5 SD from mean of the stock’s historical trading range.
Publish date: 02/09/13