The share price of Lion Industries Corp Bhd has been rising steadily from its 52-week low of 57 sen on March 16 last year.

Last week, the counter got a boost when OSK Investment Research reiterated its “overweight” call on the steel sector, pushing the stock to a 52-week high of RM1.84 last Wednesday. Lion Industries is OSK’s top buy for the sector. 

Lion Industries manufactures and markets steel bars, wire rods and hot briquetted iron (HBI). It is considered an integrated long steel producer with a focus on long steel products.

The production of long steel products, such as bars, wire rods and channels, is undertaken by the company’s subsidiaries, Amsteel Mills Sdn Bhd and Antara Steel Mills Sdn Bhd, which are equipped with modern facilities like electric arc furnaces (EAF), ladle furnaces and six-strand continuous casting machines.

Lion Industries is also involved in the tyre business via 73%-owned Lion Forest Industries Bhd. Other than steel and tyres, Lion Industries also has interests in property development.

The company was struggling in 2009 as a result of the global recession that put a dent on demand for steel products, which saw steel prices plunge. It had made losses for three consecutive quarters since 2QFY2009 ended June 30 and only turned around in 1QFY2010 as steel prices strengthened.

Revenue for the quarter ended Sept 30 was 10% lower than a year ago due to lower selling prices for steel products, despite an increase in sales tonnage. Nevertheless, the group managed to turn in an operating income of RM85.1 million, compared with an operating loss of RM64.4 million the previous quarter.

Lion Industries expressed optimism in notes to its accounts that its businesses in both local and overseas markets would improve in the next quarter. 

After its strong share price performance, is there any more upside for the stock? OSK Research, which has had a “buy” call on the counter since February 2008 (the furthest Bloomberg data made available), upgraded its target price last Wednesday to RM2.51 from RM2.11 per share.

The research house upped its earnings forecast for Lion Industries on account of surging prices for direct reduced iron, but maintained its price-earnings ratio of six times for the stock.

“We have always liked Lion Industries for being the leading industry player with a strategic plant located in the Klang Valley catchment of steel demand and its Johor plant having easy access to the Singapore market,” writes OSK Research. 

Its Pasir Gudang mill is the sole integrated steel player in the southern region, with easy export access to Singapore.

“The company is also among the few iron makers in the country that have an EAF with flexibility in raw material input other than scrap. Furthermore, the escalating selling price of HBI in line with the recent surge in scrap metal prices has put this division back into the sweet spot on widening profit margins,” it adds.

Other plus points include the company’s solid asset backing and undemanding valuation.

In its latest steel sector update, OSK Research explains that despite the steel down cycle experienced in 2H2008, Lion Industries’ financials remain strong due to its more than RM1 billion net profit registered during the two-year surge in steel prices.

Lion Industries’ net gearing had improved from 69% in FY2007 to 25.4% in FY2008 and 21.5% in FY2009.

“The robust numbers also lifted the company’s NTA to RM3.69, which translates to an undemanding P/NTA of less than 0.5 times despite the recent share price run-up,” says OSK Research.

In fact, taking into account the market capitalisation of Lion Industries’ 19% stake in Parkson Holdings Bhd, 22% in Lion Diversified Holdings Bhd and 73% in Lion Forest Industries — which works out to RM2 per share — OSK Research says the market has not attached any value to its core steel business.

What are the chances of another sharp decline in steel prices? OSK Research highlights this as one of the sector’s investment risks. 

“While the market is expecting a 20% to 30% increase in 2010/11 benchmark prices of iron ore and coking coal, we are unable to ascertain the pricing until a formal structure is ironed out. The average selling prices (ASP) of steel may fall sharply if the key benchmark prices for iron ore are either maintained or cut from the preceding year.

Also, should China fail to boost its domestic requirements and decide to remove its 15% to 25% export tax on long steel products, we may see dumping by the Chinese steel mills, which will cause steel prices to collapse again,” it says.

Aside from that, while steel mills globally — with the exception of those in China — are still running at about 50% to 70% of their peak levels of 2008, any rush in production may lead to excess supply and falling ASP.

“In any downturn, the major risk is borne by those with high inventory but there are also major beneficiaries should ASP escalate,” it adds.



This article appeared in Capital page of The Edge Malaysia, Issue 790, Jan 25-31, 2010.