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Friday, March 4, 2011

HLIB Research reduces earnings outlook for Lion Industries, cuts TP to RM1.61 (Edge)

Hong Leong Investment Bank (HLIB) Research is reducing its FY12-13 core net profit forecasts for Lion Industries Corp Bhd (LICB) by 8.5%-9.2% to RM212 million and RM230.3 million respectively.

It said on Friday, March 4 that it reduced the target price (based on sum-of-parts) by 15.7% from RM1.91 to RM1.61.

HLIB Research said the reduction in the TP was to reflect its lower earnings assumption at the steel division (arising from higher borrowing cost to finance the blast furnace project); and changes to the latest market prices of LICB’s stakes in the listed entities. Downgrade from Hold to Sell.

LCIB had on Thursday entered into a joint venture agreement with Lion Diversified (LDHB, the holding company), Lion Forest (a 73% subsidiary) and Lion Blast Furnace (LBF) to jointly undertake the CONSTRUCTION [] of a blast furnace project, which has a rated capacity of 2.1 million tonnes/annum. Under the agreement, LICB, LDHB and LFIB will invest 29%, 51% and 20% respectively in LBF.

LICB, LFIB, and LDHB would invest RM281.3 million, RM194 million and RM494.7 million respectively into the blast furnace project. LICB will also provide corporate guarantee to the project’s loan facility.

HLIB Research said the proposed equity investment by LICB and LFIB turns LICB’s net cash position into a net debt and net gearing of RM384.5 million and 0.12x respectively.

“Assuming a financing cost of 6% p.a. (before 25% corporate tax), the additional borrowing costs arising from the blast furnace project investment would bring down LICB’s FY12-13 net profit forecasts by 8.5-9.2%.

“We believe the venture could likely take a while before it could yield positive results to the group, given: 1) The volatile iron ore and coal prices, which in turn affect the economic viability of the proposed blast furnace project; and 2)

“The huge investment outlay involved (despite 70% of the project cost will be funded by borrowings) that may affect LICB’s near term working capital, in particularly, at the steel manufacturing division,” it said.

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