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Monday, October 7, 2013

LION INDUSTRIES - Seeing Deep Value


We met Lion Industries Corporation (LICB) management to get an update on the group‟s operations and steel industry outlook. We believe market concerns over the steel sector and inter-Lion group receivables have overshadowed the steep discount (80%) that LICB is trading to its net book value of RM4.39/share as at end-FY13 (June). While steel sector outlook is still weak in the near term and value of assets embedded in the group will take time to be unlocked, we view the current price of LICB of around RM0.90 as an attractive entry level at a price/book value of only 0.2x, in particular for investors who are willing to hold for a longer period. We derive our fair value of RM1.28 for LICB based on sum-of-parts valuation.

Company background. LICB has its origins as Sungei Way Dredging which was incorporated in 1924. It changed name to Supreme Corporation in 1976 and subsequently renamed to Lion Land in 1991. LICB adopted its current name in 2003. LICB has three key business segments: steel, property development and investments. Under the steel segment, it is primarily involved in the manufacturing of long steel products such as steel bars, wire rods and sections which are used in construction, fabrication and manufacturing sectors. It owns Amsteel Mills and Antara Steel Mills which have three long-steel plants in Peninsula Malaysia and one hot briquetted iron (HBI) plant in Labuan.

LICB‟s property development projects include The Promenade (Bayan Baru), Taman Malim Jaya (Melaka), Taman Soga (Batu Pahat) and St. Mary (completed JV project with E&O). LICB‟s key investments include 73%-stake in Lion Forest (LionFib), 21%-stake in Lion Diversified (LionDiv) and 17%-stake in Parkson Holdings.

Investment merits. LICB‟s key investment merits are:

(i) It is currently trading at an attractive price of 0.2x of P/BV, below its peers (range of 0.4x-0.8x) and at the low end of its traded P/B range of 0.2x-0.5x (average of 0.32x) over the past 3 years. We view the „distressed pricing of LICB as an opportunity to accumulate for long-term investors despite weak near-term outlook for the steel sector;

(ii) The market value of LICB‟s stake in three Bursa-listed companies (Parkson Holdings, LionFib and LionDiv) total to RM946m or RM1.32/share. In particular, the market value of its prized 17.1%- stake in Parkson Holdings alone is worth RM701m which is more than LICB‟s market capitalisation;

(iii) The group had a relatively low net gearing of 0.1x as at end-FY13. It had interest-bearing liabilities of RM774.3m and cash & cash equivalents of RM562.1m (of which RM236.0m at LionFib level);

(iv) The group owns several pieces of legacy prime development land, notably a 11.9-ha land in Taman Supreme, Cheras and a 28.7-ha land in North-east District, Batu Ferringhi, which carried on its balance sheet at 1991 prices; and

(v) With ongoing and planned ETP projects such as KLMRT, we believe demand for long steel products will remain intact. Although there are concerns on funding of the ETP projects, the government has indicated projects with high multiplier impact and low import content will likely to be continued. In addition, recent news reported that Malaysia may spend some RM160bn on rail-related projects by 2020 will help to sustain the demand for long steel products.

Key businesses and investments. LICB has three key business segments, namely steel, property and others such as equity investment in various companies such as Parkson Holdings.

Financials. For FY13 (June), LICB reported revenue of RM4.77bn (-14.0% y-o-y) and net loss of RM35.1m (FY12: net loss of RM38.2m). The group was affected by relatively high cost of raw materials and weak selling prices of its steel products which resulted in an operating loss of RM15.6m in FY13 as compared to an operating profit of RM26.9m in FY12. Besides weak operating numbers, LICB‟s net profit was hit by RM48.0m impairment loss on trade receivable due by a related party and RM33.9m impairment loss on investments.

As at end-FY13, LICB had a net gearing of 0.1x (FY12: 0.1x). Its net book value per share as at end-FY13 decreased to RM4.39 from RM4.46 as at end-FY12.

Investment risks. Key investment risks include: (i) prolonged weak steel pricing and outlook, in particular threat of cheap steel import from China which has excess capacity; (ii) increase in raw material or energy costs such as hike in electricity tariff; (iii) higher-than-expected provision or impairment of related-party trade receivables or other receivables; and (iv) weaker-than-expected Parkson Retail Group‟s performance in China may dampen the market value of LICB‟s stake in Parkson.

Issues/concerns raised during meeting with management.

(i) Blast furnace project. LICB is no longer involved in the Lion blast furnace project. Originally, LICB and its subsidiary, LionFib, were roped in to take 29% and 20% respectively in the project in 2011. However, the proposal to participate in the blast furnace project was terminated on 29 August 2013. We view positively of LICB not participating in the „high-risk blast furnace project.

(ii) Receivables from related parties such as Megasteel. Management highlighted that Megasteel is owned by Lion Corporation (79%) and LionDiv (21%), and is not within the LICB group. Nevertheless, LICB owns 19% and 21% in Lion Corporation and LionDiv respectively, and thus is indirectly related to Megasteel. As at end-FY12, LICB had RM477m of trade receivables due from Megasteel (55% of total trade receivables).

(iii) Government steel policy changes? In February 2013, the Malaysian government imposed anti-dumping duties on imports of steel wire rods as well as import duties on 18 grades of hot-rolled coil (HRC) steel. As such, the management is hopeful that the government will be more supportive of the local steel industry, in particular in restricting dumping of steel products from countries with excess production capacities.

Valuation – fair value of RM1.28. We derive our fair value of RM1.28 for LICB using a sum-of-parts valuation. We used P/BV valuation on its steel operations, market value for its equity holdings in listed companies and RNAV for its key land holdings such as its Cheras and Batu Ferringhi land.

With regard to the concerns on trade receivables and other receivables due to related parties, we have assumed a 50% impairment in LICB‟s receivables in a worst case scenario in our sensitivity analysis and its book value per share would decline by RM1.02 to RM3.37 which is still significantly above its last traded price of RM0.885.

Source: PublicInvest Research - 7 Oct 2013

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