Thanks to Parkson's contribution, Lion Industries managed tostay in the black in 2QFY12. However, its steel division suffered losses,largely due to the mismatch of high raw material costs and lower steel prices.The award of ETP projects may have gained pace  but the actual works couldtake  time. This, coupled with the delayedrecovery of steel prices, prompt us to cut  our earnings  estimates. However,  we are keeping our Trading BUY call,with  our FV  cut to RM1.78, on anticipationof steel  prices rebounding next monthmay spur  interest in steel stocks.  One excitement is  the litigation settlement by 73%-owned LionForest,which may lead to a possible dividend as it will unlock up to RM250m incash.

Below expectations.After eliminating a few lumpy items, Lion Industries' 2QFY12 core net profitcame in at RM10.8m but its 1H earnings disappointed us and street estimates, representingonly 22.8% of our full-year  numbers. Thefestive season that boosted Parkson's contribution, however, failed to mitigatethe huge loss in the steel division. We had earlier anticipated contributionsfrom its iron making business to cushion the losses from steelmaking in 2Q.However, the sharp plunge in both iron ore and scrap prices during that periodgave rise to a negative mismatch between lower selling prices and high rawmaterial costs (time lag impact), which eroded its iron making profit.

Improving 2H outlook?Although the implementation of 'mega' projects under the EconomicTransformation Programme (ETP) has been slow, the  momentum of project awards has been picking up. Nonetheless, it may take a while foractual works to begin and eventually raise the demand for physical steel. Thisaside, steel prices have remained lacklustre and  defied our earlier expectations of a possible recovery in February. We suspectthat prices may turn up in March, with China expected to bump up constructionactivities as it enters the spring season. With the maintenance of its Hot BriquettedIron (HBI) plant scheduled for next month, the group's  3Q numbers are not expectedto look pretty. Thus, we feel compelled to slash our FY12 and FY13 numbers by 40.4%and 34.8% respectively.     

Maintain Trading BUY.Although let down by the long-standing delay in Lion Industries' steel assetdisposal, any sale  would immediatelyunlock  the value of its  assets. The strong correlation between steeland share prices also suggests  thatsteel price may escalate and spur interest in steel counters. We are  also excited over thelitigation settlement by its subsidiary, which may unlock up to RM250m  for  73%-owned Lion Forest, leading to a possibledividend being streamed up. As such, we keep our Trading BUY call on LionIndustries, with its FV trimmed to RM1.78 following our earnings cut. We valuethe stock at 0.4x FY12 P/BV, or the mean of its historical trading range.

Source: OSK188