Results

LICB reported weaker than expected 9MFY14 performance, with core net loss of RM30.4m vs. consensus and our fullyear core net profit forecasts of RM28.6m and RM10.9m respectively.

Deviations

Higher-than-expected finance costs.

Highlights

YTD. 9MFY06/14 performance weakened to a core net loss of RM30.4m from a core net profit of RM3m a year ago, mainly on the back of: (1) widened losses at the steel manufacturing division, in particularly, during 1H (on lower selling prices and sales tonnage, coupled with a 2-month shut down at the hot briquetted iron plant in Labuan during 1Q); and (2) weaker associate and JV earnings.

QoQ. 3QFY06/14 performance improved further, with a net profit of RM11.1m (vs. RM2.7m in the previous quarter) mainly on the back of a turnaround at the steel manufacturing division (which has in turn resulted in the division’s performance improving to an operating profit of RM8m from a loss of RM5.9m in the previous quarter).

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

We project Lion Ind to register a full-year net loss of RM19.1m (from a net profit forecast of RM10.9m), largely to account for higher finance cost assumption. Maintain earnings forecast for FY06/15, as we believe our FY06/15 earnings forecast has already reflected Lion Ind’s bleak earnings outlook.

Rating

CEASE COVERAGE

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 2 sen to 69 sen (see Figure 4) as we updated the latest market prices of the listed subsidiary and associates. We are taking this opportunity to cease coverage on the stock, as we believe earnings prospects will likely remain weak in the medium term.

Source: Hong Leong Investment Bank Research - 28 May 2014