Results

9MFY06/13 core net profit of RM39.3m beat expectations, accounting for 127% of HLIB’s full-year forecast and 86% of consensus full-year estimates.

Deviations

Higher-than-expected associate and JV contribution.

Dividends

None

Highlights

QoQ. Despite revenue increasing by only 7%, 3QFY06/13 returned to the black, with a core net profit of RM49.5m. The improved performance was due mainly to turnaround at the steel manufacturing division, which in turn was due to higher steel prices.

YTD. 9MFY06/13 core net profit rose by 8.1% to RM39.3m mainly due to higher contribution from the building material division, lower finance costs and higher investment income, which altogether more than offset weaker steel manufacturing performance (arising from mismatch between selling price and raw material cost and weaker economies of scale in 1H13, partly offset by turnaround in 3Q).

Risks

(1) Overcapacity in China remains over the longer term; (2) Volatile input prices; and (3) Influx of steel products at cheap prices.

Forecasts

FY06/13-14 net profit forecasts raised by 63.3% and 15.7% respectively, to reflect higher associate contribution.

Rating

HOLD

• Negatives – (1) Inability to pass on higher cost of raw materials to end-users; (2) Complicated corporate structure; and (3) Corporate governance issue could surface from its proposed venture into blast furnace project.
• Positives – One of the biggest winners from anticipated pick-up in construction activities from ETP given its huge capacity.

Valuation

• SOP-derived TP (at 50% holding company discount) raised by 7.9% to RM1.23 to reflect the latest market prices of the listed subsidiary and associates. We continue to hold the view that the near-term earnings outlook of the sector will remain weak as the fortunes of steel sector in Malaysia are very much tied to the international market movement, in particularly China (the world’s largest steel producing country). Moreover, major steel players in the region recently announced steel price cuts, indicating weak demand ahead. Nevertheless, the current low P/B multiple (at close to 1 standard deviation below mean), coupled with the positive market sentiment, we believe there is room for LICB’s share prices to advance further in the near term, overshooting its fundamentals. Maintain HOLD recommendation

Source: Hong Leong Investment Bank Research - 31 May 2013