- We re-initiate coverage on Lion Industries Bhd (LICB) with a HOLD recommendation and an SOP-derived fair value of 82 sen/share.

- Our HOLD call is premised on a muted outlook on the steel sector, driven by:- (i) higher operation costs due to a hike in electricity tariff; (ii) overcapacity in China, which continues to suppress global steel prices; and (iii) dumping of cheap wire rods and billets from China in the local market.

- While the acceleration of MRT jobs is expected to benefit steel players, LICB’s earnings will be muted due to depressed margins given the rise in costs and weak selling prices.

- Meanwhile, prospects for its 17%-owned Parkson remain subdued in the challenging operating environment amid the economic slowdown in China. We project marginal earnings growth of 3%-4% for FY15F-16F.

- Following a restructuring exercise that was completed early last year, Lion Corp Bhd had disposed of its 27% stake in LICB to Tan Sri William Cheng, who now holds a 30% direct stake in LICB. We are also positive over the recent termination of a proposed joint-venture to develop a blast furnace.

- On the property front, LICB launched The Promenade (85% equity portion) in June last year, with a gross development value of RM250mil. The mixed development has an 80% takeup rate and will be completed in 2016. We expect the project to contribute about RM63mil-RM85mil to the group’s revenue in FY14-FY16F.

- We understand that LICB’s hot briquette iron (HBI) plant continues to procure natural gas at the current rate as the group has yet to finalise the new tariff with Petronas. We have raised our tariff rate by 40% for FY15F and FY16F in anticipation of a hike. We have also imputed a 17%-19% hike in electricity tariff into our model.

- We expect FY14F earnings to be muted due to weak steel prices and to reflect a two-month shutdown of its HBI plant in Labuan. Nevertheless, we expect FY15F-16F numbers to slightly improve on better margins and a pick-up in steel demand.

- Note that its sister company, Lion Corp, had recently slipped into PN17 status. As at end-June, LICB had RM433.8mil in trade receivables owed by Lion Corp’s key subsidiary, Megasteel. On a positive note, LICB has a low net gearing of 8.6% as at end-FY13.

- To reflect the tough operating environment and muted outlook, we have imputed a 75% discount to our SOP-derived value of RM3.28/share, to arrive at a fair value of 82 sen/share.

Source: AmeSecurities