We turn cautious on LLB after it booked a MYR44.2m core loss in 1Q14. The disruption  at  the Labuan  jetty  halted  production at  its prized ironmaking plant  for two months. The festive season also  dampened  steel demand and prices as well. Investors may shy away from LLB due to its sister company’s PN17 status owing to a  possible default in  the latter’s trade receivables. Downgrade to NEUTRAL, with a MYR0.76 FV.

• Dismal  start  to  FY14.  Despite  our  low  expectations,  Lion  Industries (LLB)’  core  net  loss  of  MYR44.2m  in  1Q14  -  after  stripping  off  a MYR10.1m impairment loss –  came below  our  and street estimates.  Its steel  unit  posted  a  core  operating  loss  of  MYR55.7m  in  1Q  due  to weakened  steel  prices,  on  top  of  the  Hari  Raya  festival  and  fasting month  which  lulled  construction  activities  and  dampened  steel  usage. Additionally,  its  Labuan  plant,  which  produces  hot  briquetted  iron,  was shut down for two months from a shiploader system being damaged by a vessel while berthing in its jetty. Note that the Labuan plant is  typically a main contributor to its steel unit. LLB also received a  lower contribution from 17%-owned Parkson (PKS MK, NEUTRAL FV: MYR3.40).
• Recovery only likely in 2H. Meanwhile, we expect steel demand to pick up. The steel price may stabilise, thereby improving margins moving into 2H14.  We  are  encouraged  by  the  number  of  projects  currently  in progress  vs  those  nearing  completion  or  were  recently  handed  over. While  Budget 2014 did not cancel  any  mega projects, the Government’s pledge to help develop affordable homes came as a relief.
• Now  a  NEUTRAL.  Although  the  steel  market  may  improve,  we  are disappointed  with  LLB’s  poor  1Q  results.  Hence,  we  cut  our  FY14/15 estimates by 41.7/8.4% respectively. We also turn more cautious after its sister  company,  Lion  Corp  (LCB  MK,  NR)  recently  slipped  into  PN17 status.  LLB  has  MYR433.8m  in  trade  receivables  due  from  LCB’s  key subsidiary (as at 30 June), Megasteel SB. As its valuation appears to be distressed, trading at less than 20% of its BV, we downgrade the stock to NEUTRAL  (from  Trading  Buy).  Our  lower  FV  of  MYR0.76  (from MYR1.21) is based on  0.17x FY14F P/B, as we pare our  target  P/B  to  -1.5 SD (from -0.5 SD) from the stock’s 5-year historical trading range.

Financial Exhibits

SWOT Analysis

Company Profile
Lion Industries Corporation is an integrated long steel producer with a focus on long steel products.

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Source: RHB