• Business profile. With operating track record spanning more than four decades. LEONFB (listed in June 2013) is involved in the business of trading (contributed 49% and 33% to FY16 revenue and gross profit) and processing (accounted for 51% revenue and 67% gross profit) of steel products (i.e. carbon steel, stainless steel and alloy steel) of different shapes, dimensions and grades services customized according to clients’ requirements.

• The trading activity is specialized in buying and selling flat and long steel products while its processing division is synergistic to the trading business by providing value-added services to customers such as cutting, levelling, shearing, profiling, bending and finishing, as well as producing customized expanded steel upon customer request. LEONFB’s diversified product offerings have enabled the Group to meet the needs of a large customer base 3,000 active customers.

• Solid earnings delivery despite uncertainty in the steel industry. Whilst most of the steel players recorded pathetic performance over the years due to slowdown in demand and issues of overcapacity, LEONFB continued to register consistent earnings track record despite the highly challenging operating environment. The commendable performance was mainly driven by proven track record in product quality, service reliability and synergistic benefits, extensive products diversifications and able to offer competitive pricing due to economies of scales. Meanwhile, it has also built up a large customer base across various sectors and channels that provides a good cushion in the event of downturn.

• Enter a more dynamic of growth and profitability. Riding on better operating landscapes (i.e. recovery in steel prices, Government’s safeguard duty and anti dumping policy, robust infrastructure activitities etc), LEONFB’s mid to long term growth will be driven by capacity and efficiency enhancements from the commencement of a new warehouse in the Port Klang Free Zone and major renovation and refurbishment of processing plant since 2016. In order to widen its income stream, LEONFB is also venturing into the steel pipe manufacturing business by2H18 as many of its regular customers are purchasers of steel pipes.

• Bullish Cup & Handle formation. The cup and handle formation suggests that the next leg up is likely taking place now. A decisive handle pattern breakout in the near term could spur prices higher, supported by upticks in indicators. A strong breakout above RM0.69 (upper Bollinger band) will push share prices above 52- week high of RM0.76 (50% FR) and RM0.80 (potential pattern breakout). Key supports are RM0.655 (10-d SMA) and RM0.63 (50-d SMA). Cut loss at RM0.625.

Source: Hong Leong Investment Bank Research - 2 May 2017