Will Leon Fuat Breakout from its Side Way Movement?

Leon Fuat Berhad is primarily in the business of trading and processing of steel products, specialising in rolled long and flat products. The company focuses is on carbon steel, of which the majority are mild steel and complemented by stainless steel and alloy steel. The company also have in-house facilities to undertake cutting, levelling, shearing, profiling, bending and finishing of products as well as production of expanded metal.

Within the company’s trading activities, it carries a wide portfolio of steel products which include flat products such as coils, plates, sheets, and welded tubes and pipes, welded rectangular and square sections, and long products such as bars, rods, shafts, sections, angles and channels and seamless tubes and pipes.

As part of the company’s value-added activities, the company also undertake processing activities which include cutting, levelling, shearing, profiling, bending, finishing as well as production of expanded metal to service the needs customers in different industry sectors and for various applications.

Leon Fuat also trade specialised steel materials such as tool steel and non-ferrous metal products such as bronze, brass, aluminum and copper.

Based on Financial Year (FY) 2015 full year results, Leon Fuat achieved RM 505 million turnover, which is considered to be a mid-size enterprise based on turnover value. Other aspects of the company’s latest financial results are illustrated in the table below.

Leon Fuat was listed only since year 2013, hence the analysis will be based on 3 Financial Years (FY) from FY2013 onwards. Over the latest three FY results, Leon Fuat’s revenue has been on an uptrend from RM 455 million in FY2013 to RM 505 million in FY2015 which translates to a 11% increase or an average year to year increase of 5.3%.

In terms of net earnings, Leon Fuat has been experiencing a decreasing trend from RM 25 million in FY2013 to RM 18 million in FY 2015. This translates to a 28% decrease or a year to year decrease of 15%. Decreasing net profit with an increasing revenue shows the company faces great challenge in controlling overheads and financial cost as well as uncertainty in steel prices in the market which affects steel trading margins.

Net profit margin wise, Leon Fuat scores a 3.66%, which is a consider very low for a company in the manufacturing sector. Return On equity (ROE) wise, Leon Fuat is also relative low at 7.87%.

On company’s debt, Leon Fuat has a high debt to equity ratio at 0.71, meaning 71% of the company’s value is made up of current and long term liabilities. The company’s current ratio is great at 1.71 but cash ratio is at negative value of -0.1. This means that the company does not hold any cash on hand, however as their current asset are off metals which are consider good in liquidity, holding less cash on hand is acceptable in this case.

Leon Fuat pays a higher than average 3% dividend yield at a low payout ratio of 0.25, which is good as this shows that the company has three quarter of their earnings available for capital expenditure.

In conclusion, Leon Fuat is a mid-size enterprise with an average financial fundamental, high liability but good in achieving consistent revenue growth over the years. Looking at the Trailing Twelve Months (TTM) financial performance, it is projected that Leon Fuat will experience a revenue decrease but increase in net profit.

The increase in net profit is due to the company achieving extra ordinary high profit on 2^nd quarter at RM 11 million versus the average RM 3 to 6 million per quarter due to great reduction in operation direct cost and financial cost. In order to achieve a breakout, Leon Fuat has to achieve better than expected quarterly results as well as sustain its cost cutting measures for the next quarter to end FY2016 with a strong note.

Next quarterly results announcement should be on the month of Feb 2017 for Q4 results.

iVolume Spread Analysis (iVSA) & comments based on iVSAChart software – Leon Huat

Based on Leon Huat’s 6-month weekly iVSAChart, the stock hits a 52-week intraday high at RM0.615 in Sep 2016 before retracing to the 6-month support levels around RM0.42 to RM0.43. For dividend seeking investor who may consider Leon Huat with longer term view, do look out for Sign Of Strengths (green arrow) before accumulating as the sideway movements may to continue for a while.

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