Results

LICB reported weaker than expected 1HFY14 performance, with core net loss of RM41.5m vs. consensus and our fullyear core net profit forecasts of RM48.7m and RM19m respectively.

Deviations

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

Highlights

YTD. 1HFY06/14 core net loss widened to RM41.5m (from RM10.1m a year ago) mainly on the back of: (1) Lower selling prices and sales tonnage, coupled with a 2-month shut down at the hot briquetted iron plant in Labuan during 1Q, that resulted in operating losses at the steel manufacturing division widened by 8.8% to RM61.5m; (2) Weaker performance at the building materials trading division; and (3) Weaker earnings contribution from Parkson and Mergexcel Property, which has in turn resulted in associate and JV earnings declining by 39.6%.

QoQ. 2QFY06/14 performance turned around, with a small core net profit of RM2.7m (vs. core net loss of RM44.2m in the previous quarter) as operating loss at the steel manufacturing division narrowed to RM5.9m vs. RM55.3m in 1Q (as the hot briquetted iron plant in Labuan resumed operation since Oct-13).

Despite the qoq improvement at the steel manufacturing division, we are keeping our cautious view on the overall steel sector (including Lion Ind) earnings prospects, as: (1) Overcapacity issues will continue to drag the sector’s earnings prospects (and it remains to be seen if the continuous efforts is effective to counter dumping activities); and (2) Higher electricity tariff (effective Jan 2014) will further impair players’ razor-thin earnings, given the highly competitive steel market in the region.

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 42.5% and 15.3% respectively, to account for higher production cost 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 by 1 sen to 71 sen (see Figure 4) as we updated the latest market prices of the listed subsidiary and associates. We note that the downward revision in our earnings forecasts at the steel manufacturing division does not affect our SOP valuation, as we are applying 0.4x to the division’s book value.

Source: Hong Leong Investment Bank Research - 28 Feb 2014