Results

LICB reported weaker than expected performance, with core net loss of RM44.2m vs. consensus and our full-year core net profit forecasts of RM58.8-58.9m for FY06/14.

Deviations

Larger-than-expected losses at the steel manufacturing division.

Dividends

None

Highlights

QoQ. 1QFY06/14 turned into a core net loss of RM44.2m (from a core net profit of RM7.4m) mainly on the back of weaker performance at the steel division, which in turn was hurt by higher raw material costs and damage in shiploader system that resulted in temporary shutdown at the Labuan hot briquetted iron plant for two months during the quarter.

We are keeping our cautious view on the steel sector’s fortunes, as: (1) High iron ore prices (which was spurred by restocking activities in China) will continue to compress LICB’s steel segment’s profitability; (2) Overcapacity issues will continue to drag on the sector’s earnings prospects; and (3) It remains to be seen if the recent new measures by the Chinese government are effective to curb overcapacity issue in China.

Risks 

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

Forecasts 

FY06/14-15 net profit forecasts cut by 11.3-11.6%, mainly to account for higher raw material price assumptions at the steel manufacturing division.

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 with related parties.

Positives – One of the biggest winners from anticipated pick-up in construction activities from ETP given its huge capacity.

Valuation

SOP-derived TP cut from RM1.11 to RM0.90 as we: (1) Updated the latest market prices of the listed subsidiary and associates; and (2) Raised our holding company discount on the stock (from 50% to 60% mainly to reflect the bleak earnings prospects of the steel sector as well as the retail sales outlook in Parkson). Although there is still deep value in the company (after our downward TP adjustment), we believe share price will unlikely perform in the near term, given the macro headwinds that will likely result in investors’ lackluster interest towards the sector. Hence we are keeping our Hold recommendation on the stock.

Source: Hong Leong Investment Bank Research - 28 Nov 2013