ECM Libra Research initiates coverage on Lion Industries with Strong Buy call

KUALA LUMPUR (April 23): ECM Libra Investment Research has initiated coverage on Lion Industries Holdings Bhd at RM1.37 with a strong Buy recommendation and target price of RM2.16.

In a note Monday, the research house said the share price had fallen 37% from its previous peak of RM2.16, reflecting the bearish sentiment faced by the local steel industry, marked by deteriorating earnings reported by its peers like Masteel, Kinsteel and Perwaja over the past few quarters in CY11.

ECM Libra said the company has managed to revamp its balance sheet from being highly geared in FY06 (101%) to one with a net gearing of 3% at end-2QFY12, thus adding 58% to its NAV/share over the period.

“However, we think this accretion to shareholders’ funds has been overlooked as the stock trades at only 0.3x P/B, which is a steep discount to its peer average P/B of 0.6 times.

“Therefore, we feel that the stock deserves to be re-rated to RM2.16, based on sur sum-of-parts valuation, implying a forward FY13 P/B of 0.5 times,’” it said.



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RHB Research maintains underweight for steel sector

KUALA LUMPUR (Feb 16): RHB Research Institute is maintaining its Underweight outlook on the steel sector.

It said on Thursday that for the October-December 2011 quarter, most Malaysian steel producers were expected to report losses.

“We believe there is substantial downside risk to 2012 consensus earnings forecasts as well,” it said.

RHB Research said China’s end-demand for steel could turn out to be weaker than expected in the absence of policy easing in its real-estate sector.

It said this was evident in the recent decision by the local authority of a Chinese city to temporarily suspend its home subsidy policy on Feb 12, after introducing it just three days before.

The research house said the pace of consolidation in China’s steel industry has not really gathered momentum in the past few years, resulting in a still highly-fragmented industry with excess and outdated capacity, weighing down on industry margins.

“Decline in raw material costs, particularly iron ore, is likely to be milder than expected due to supply constraints in India (export duty hike), Australia and Brazil (weather disruptions),” it added.

“We have cut FY12-13 EPS forecasts for steel companies under our coverage by 15-23%, largely to reflect lower selling prices for steel products and higher raw material costs.

“We also rationalised our valuation method to PBV (using historical average for each company), for Ann Joo (FV raised to RM1.70, from RM1.40) and Lion Industries (FV raised to RM1.37, from RM1.19),” it said.



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Tough times for local steel players

KUALA LUMPUR: Malaysian steel companies were not spared from plummeting steel prices in the last quarter of 2011.

“The prices will definitely affect the earnings during that period,” said a MIDF Research analyst, who covers the sector, when contacted by The Edge Financial Daily.

This could provide an insight into earnings announcements for the final quarter of last year that local steel players will be posting in the coming weeks.

According to MIDF, margins between steel billets and bars are likely to narrow, potentially causing steel producers to report a net loss in their upcoming quarterly results.

According to data from the London Metal Exchange, spot prices of steel billets last year peaked in mid-August at around US$700 (RM2,107) per tonne, but started on a downtrend soon after.

The price of steel billets, a semi-finished product used to make steel bars, was US$485 per tonne at press time, having fallen 11% from US$545 per tonne in the past month.

According to another analyst who tracks the property sector, local steel bar prices dipped from a high of RM2,500 per tonne during the year to around RM2,120 in 4Q. They are now trading at around RM2,120 per tonne, he added.

Several local steel companies have shown signs of slowing profits resulting from the increase in costs between 2Q and 3Q of 2011, when steel prices were declining.

An example is Ann Joo Resources Bhd. The group sank into the red with a net loss of RM24.54 million in 3QFY11 ended Sept 30 from a net profit of RM32.75 million in 2QFY11.

Lion Industries Corp Bhd also showed signs of slowing net profits over two of its quarters last year in its latest earnings announcement. It posted a net profit of RM27.62 million in 1QFY12 ended Sept 30, 2011 from RM45 million the previous quarter. Besides softening prices, MIDF also said global steel production and utilisation has slowed down.

“Latest numbers from the World Steel Association confirmed our worries about the global steel industry. Global steel production was 1.53 billion tonnes in 2011, up by only 6.8% compared with 15% year-on-year in 2010,” said the research house.

China’s steel production, which accounts for 45% of the world’s output, is the largest globally and has also showed signs of slowing.

In December, China’s steel production rose 4.6% to 52.5 million tonnes, which was 13% lower than its peak of 60.2 million tonnes in May 2011.

Global utilisation has also trended lower at 73.4% in November 2011. “[This was] the lowest since April 2011,” said the research house. China’s slowing production is an indicator of worrying times for the steel industry.

“This is because the steel industry depends heavily on the property market in China,” said the analyst from MIDF, adding that the reason for China’s slowdown is due to its government’s efforts to curb its property market.

Hence, he fears that there could be an oversupply of steel in China, resulting in cheap imports of steel into Malaysia, thus posing a threat to local millers.

Global steel demand is tempered by an economic slowdown in China, and a likely recession in Europe, where orders for steel products for construction, cars and machinery are slowing.

What could potentially help domestic players are local construction projects like the Economic Transformation Programme (ETP) and the 10th Malaysia Plan (MP). The local projects under these programmes include the Klang Valley MRT (the Sungai Buloh-Kajang line), the Gemas-Johor Baru double-tracking railway and the KL International Financial District.

Rather than a sudden surge in demand for steel from these projects, the analyst said “demand will gradually improve because the ETP and the 10th MP will be implemented in stages”.

The analyst also said the construction sector would have the choice of buying cheap imports from China or local players. The former would certainly put the local steel industry at a serious disadvantage.

Larger steel players like Lion Industries or Ann Joo could probably counter the import of steel, but smaller ones may have a tougher time, according to the analyst.

Prices of steel will continue to depend on China and the weakening demand is expected to continue into the rest of the year.


This article appeared in The Edge Financial Daily, February 10, 2012.



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Uncertainty in sector

Steel sector
Maintain neutral: The latest numbers from the World Steel Association confirmed our worries about the global steel industry. Global steel production was 1.53 billion tonnes in 2011, up by only 6.8% compared with 15% year-on-year in 2010. Although steel production in China rose by 4.6% in December to 52.2 million tonnes, it was still 13% lower than the peak in May 2011 of 60.2 million tonnes.

The world’s steel utilisation rate also trended lower at 73.4% in November 2011, the lowest since April 2011. We believe the unresolved European debt crisis coupled with a slower property market in China are among the factors that led to the weakening global steel demand. As these risks are likely to persist in the foreseeable future, we expect the weakening demand trend to continue for the rest of the year.

Local growth in steel demand continues to be driven by ongoing construction projects.

We estimate about RM63 billion in total project value under the Economic Transformation Programme (ETP) and 10th Malaysia Plan will be awarded in 2H12. This should boost demand for steel products this year.

The RM4 billion River of Life project in Kuala Lumpur should boost demand for
steel products this year.

Among the projects are the Klang Valley MRT Sungai Buloh-Kajang Line (RM20 billion), Gemas- Johor Baru double tracking railway (RM8 billion), Menara Warisan (RM5 billion), River of Life (RM4 billion), KL International Financial District (RM26 billion).

China is the biggest consumer of iron ore, coal and copper. The country is also the biggest steel producer, accounting for 45% of world steel production. According to our economist, China is still addressing inflation by tightening lending and curbing investment to prevent overheating and inflation.

More importantly, China’s government continues to curb the residential real estate market, thus bringing down its home prices. As a result of the tightening policy in the property market, China’s steel millers have faced overcapacity, which dragged down steel prices.

We believe there is a possibility that China’s oversupply situation may lead to cheap imports in Malaysia. With steel demand in China staying sluggish, we would not be surprised if there are elements of “dumping” in China’s export strategy moving forward.

The presence of cheap imports will adversely impact local steel players’ earnings.

The prices of upstream/upper-midstream steel products (billets, steel bar, and wire rod) are still depressed. Billet and steel bar prices are now trading at 7.4% and 8% below their one-year historical average prices. In addition, prices of scrap metal, the raw material for steelmaking, have rebounded after the huge decline since September 2011. This means that the margins of billet and steel bar producers are likely to narrow, potentially causing steel producers to report a net loss in the upcoming quarterly results.

Prospects are better for steel millers using iron ore as their feedstock, compared with those using scrap metal. Indeed, the spread between long steel product (billet) prices and iron ore has widened to US$499 (RM1,517) per tonne from US$475 two months ago.



Currently, most Malaysian steel millers are using scrap metal as their feedstock for steelmaking, except for Ann Joo Resources Bhd.

In October 2011, the group pre-commenced its mini integrated blast furnace. With the blast furnace in place, Ann Joo can flexibly switch between scrap metal or iron ore (according to market conditions) for its steel manufacturing. We have a “neutral” call on Ann Joo with a target price of RM1.78.

So far, the share prices of steel counters under our coverage — Lion Industries Corp Bhd, Kinsteel Bhd and Ann Joo have outperformed the KLCI. This was due to the short rally prior to Chinese New Year. Although we are positive on local steel, we do not expect the prices of steel stocks to recover significantly for the rest of this year as industry fundamentals are still weak. Steel product prices have yet to recover while raw material prices are trending higher.

We reiterate our “neutral” call on both Kinsteel (target price: RM0.51) and Ann Joo (TP: RM1.78) and “sell” call with an unchanged TP of RM1.14 on Lion Industries. — MIDF Research



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OSK Research maintains Neutral on Lion Industries, FV RM1.50

KUALA LUMPUR (Dec 22): OSK Investment Research has maintained its Neutral call on Lion Industries Corp Bhd with a fair value of RM1.50 and said it welcomed that the group was actively seeking mining assets, although the details were scarce.

The research house however added that the steel market was still fraught with challenges considering the slow execution of domestic projects and the impending consolidation of China’s steel industry, which may hurt global sentiment.

“Talks with potential investors on the sale of its steel units are still ongoing but we see an indefinite delay in the outcome.

“Thus, we keep our NEUTRAL call with a Fair Value of RM1.50 in the absence of immediate catalysts,” it said on Thursday.



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KLCI extends losses at mid-morning, new listing Pavilion most active

KUALA LUMPUR (Dec 7): The FBM KLCI extended its losses at mid-morning on Wednesday as cautious sentiment kept investors on the sidelines.

Regional markets, however, mostly edged up on optimism that Standard & Poor’s threat of mass credit rating downgrades will pressure European leaders to come up with a convincing framework for resolving the euro zone debt crisis at a crucial summit later this week, according to Reuters.

The FBM KLCI fell 3.90 points to 1,477.02, weighed by losses at select blue chips.

Gainers edged losers by 184 to 163, while 231 counters traded unchanged. Volume was 545.44 million shares valued at RM268.58 million.

At the regional markets, Japan’s Nikkei rose 0.70% to 8,634.93, Hong Kong’s Hang Seng Index gained 0.84% to 19,101.11, the Shanghai Composite Index was up 0.22% to 2,330.94, Taiwan’s Taiex rose 1.11% to 7,033.64, South Korea’s Kospi up 0.80% to 1,918.09 while Singapore’s Straits Times Index was 0.54% higher at 2,764.19.

Maybank Investment Bank Bhd head of retail research and chief chartist Lee Cheng Hooi in a note to clients on Dec 7 said the FBM KLCI’s resistance areas of 1,480 and 1,503 may cap market gains, whilst the obvious support areas may be located at 1,458 and 1,477.

“Despite the US markets’ firm tone last night, we might not see a good day for the local index further gap filling takes place today,” he said.

Meanwhile, ECM Libra Investment Research in a strategy note on Dec 7 said it expects the FBM KLCI to trade in a range of 1,520 and 1,300 in 1H2012 before moving up towards 1,600 in 2H2012.

It said Malaysia had outperformed in 2011 and was not cheap relative to other markets.

“Hence, for better potential upside, we would be buying individual stocks that have underperformed the FBMKLCI due to negative news or developments, but could see a turnaround in their situation.

“We have identified Tenaga Nasional and Lion Industries,” it said.

Among the decliners on Bursa Malaysia, MAHB fell 21 sen to RM5.83, Proton down 18 sen to RM4.13, UMW 13 sen to RM6.54, Hong Leong Bank 12 sen to RM10.72, Lafarge Malayan Cement 11 sen to RM6.61, Tasek and Baneng fell 10 sen each to RM7.70 and 3 sen, while IJM Corp and Axis REIT fell six sen each to RM2.65 and RM2.55.

Pavilion REIT, which made its debut on the Main Market of Bursa Malaysia, was the most actively traded counter at mid-morning with 88.65 million units done. The counter added 8.5 sen to 98.5 sen.

Other actives included Sanichi, LFE Corp, MLabs, Wijaya warrants and Compugates.

Gainers at mid-morning included Nestle, Aeon, Orient, QSR, Dutch Lady, BHIC, Perstima and Genting.



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Lion Industries post RM27.6m 1Q net profit

KUALA LUMPUR: Lion Industries Bhd posted a net profit of RM27.6 million for the first quarter ended Sept 30 (1QFY12), turning the corner from a net loss of RM18.8 million for the corresponding period a year earlier.

The group’s revenue rose 42.4% to RM1.33 billion compared with RM936 million a year earlier. For the three months in review, the company posted basic earnings per share of 3.85 sen versus a basic loss per share of 2.62 sen a year ago.

In its filing with Bursa Malaysia, Lion Industries said the higher revenue was due to higher sales tonnage and selling prices of its steel products.

After accounting for higher profits from associate companies and jointly-controlled entities of RM25.3 million, Lion Industries posted a profit before tax of RM37 million against a loss before tax of RM36.4 million a year earlier.

On its outlook, Lion Industries said the group’s operating environment would remain challenging in view of uncertainties surrounding the global economy.

“Demand for steel products is expected to be soft while raw material prices remain volatile. On the domestic front, demand for steel products is expected to recover, driven primarily by the initiatives implemented under the Economic Transformation Programme (ETP),” it said.

It added that its steel business would achieve a satisfactory set of results in the next quarter due to ETP initiatives.

Lion Industries rose two sen to close at RM1.36 yesterday with 452,100 shares done.


This article appeared in The Edge Financial Daily, November 30, 2011.



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