Strong Buy for Lion Industries by ECMLibra

Highlights of the day. Lion Industries (Initiating Coverage): Same lion with a different skin (STRONG BUY, TP: RM2.16)

We initiate coverage on Lion Industries with a Strong Buy call. The share price has fallen 37% from its previous peak of RM2.16, reflecting the bearish sentiment faced by the local steel industry, marked by deteriorating earnings reported by its peers like Masteel, Kinsteel and Perwaja over the past few quarters in CY11. The company has managed to revamp its balance sheet from being highly geared in FY06 (101%) to one with a net gearing of 3% at end-2QFY12, thus adding 58% to its NAV/share over the period. However, we think this accretion to shareholders’ funds has been overlooked as the stock trades at only 0.3x P/B, which is a steep discount to its peer average P/B of 0.6x. Therefore, we feel that the stock deserves to be re-rated to RM2.16, based on our sum-of-parts valuation, implying a forward FY13 P/B of 0.5x.

by ECM Libra