Stock Name: LIONIND
Company Name: LION INDUSTRIES CORPORATION
Research House: HLG
Lion Industries Corp Bhd (LICB)
(March 22, 2011, RM1.68)
Maintain 'sell' at RM1.64 with target prices of RM1.61: LICB management has revealed details of its proposed RM3.2 billion blast furnace project, including the rationale for the proposed joint investment, projected internal rate of return (IRR) and expected payback period of the project.
The management believes the project would allow both Amsteel Mills and Megasteel to substitute a portion of their raw materials with hot metal produced from the proposed blast furnace, which would in turn result in better production efficiency and better product quality. The project would also allow Lion Blast Furnace (LBF) to market slabs to both domestic and Asean steel producers. According to LICB's announcement on March 3, LBF aims to convert about 75% of the liquid hot metal from the blast furnace into slabs and sell them in the open market domestically and overseas.
We understand that slabs production is currently under-invested in Asean; the region imported roughly 3.5 million tonnes of slabs, which are equivalent to almost half of the region's total slabs consumption in 2009.
Bright demand prospects aside, LBF would also be able to take advantage of the preferential tariffs within the Asean region such as the zero import duty for steel products with a minimum 40% local content.
The management also revealed that the completion of the blast furnace would allow the group to compete head on with the regional large-scale integrated steel players by selling the by-products such as slags, crude tar, ammonia, benzene, sulphur and carbon credit.
Based on management's estimates, the sale of by-products as well as electricity cost savings arising from the generation of power from blast furnace and coke oven gas would result in a total cost savings of RM295 million a year,'' assuming the blast furnace is operating at full utilisation rate.
Management expects the blast furnace to contribute positively to the group in its first year of operation, produce an IRR of 17% and have a payback period of six years, assuming the current market condition will be sustained with 100% utilisation rate.
While we have no doubt on the longer-term feasibility of the project, which can eventually yield positive results to the group, we are keeping our negative view on the proposed investment project for now.
This is due to the volatile iron ore and coking coal prices, which will affect the economic viability of the blast furnace project.
On top of that, the potential corporate governance issue given that this is a related-party transaction and the huge investment outlay involved in the project may affect LICB's near-term working capital, in particular, its steel operations are factors for concern. ' Hong Leong Investment Bank Research, March 22
This article appeared in The Edge Financial Daily, March 23, 2011.
Company Name: LION INDUSTRIES CORPORATION
Research House: HLG
Lion Industries Corp Bhd (LICB)
(March 22, 2011, RM1.68)
Maintain 'sell' at RM1.64 with target prices of RM1.61: LICB management has revealed details of its proposed RM3.2 billion blast furnace project, including the rationale for the proposed joint investment, projected internal rate of return (IRR) and expected payback period of the project.
The management believes the project would allow both Amsteel Mills and Megasteel to substitute a portion of their raw materials with hot metal produced from the proposed blast furnace, which would in turn result in better production efficiency and better product quality. The project would also allow Lion Blast Furnace (LBF) to market slabs to both domestic and Asean steel producers. According to LICB's announcement on March 3, LBF aims to convert about 75% of the liquid hot metal from the blast furnace into slabs and sell them in the open market domestically and overseas.
We understand that slabs production is currently under-invested in Asean; the region imported roughly 3.5 million tonnes of slabs, which are equivalent to almost half of the region's total slabs consumption in 2009.
Bright demand prospects aside, LBF would also be able to take advantage of the preferential tariffs within the Asean region such as the zero import duty for steel products with a minimum 40% local content.
The management also revealed that the completion of the blast furnace would allow the group to compete head on with the regional large-scale integrated steel players by selling the by-products such as slags, crude tar, ammonia, benzene, sulphur and carbon credit.
Based on management's estimates, the sale of by-products as well as electricity cost savings arising from the generation of power from blast furnace and coke oven gas would result in a total cost savings of RM295 million a year,'' assuming the blast furnace is operating at full utilisation rate.
Management expects the blast furnace to contribute positively to the group in its first year of operation, produce an IRR of 17% and have a payback period of six years, assuming the current market condition will be sustained with 100% utilisation rate.
While we have no doubt on the longer-term feasibility of the project, which can eventually yield positive results to the group, we are keeping our negative view on the proposed investment project for now.
This is due to the volatile iron ore and coking coal prices, which will affect the economic viability of the blast furnace project.
On top of that, the potential corporate governance issue given that this is a related-party transaction and the huge investment outlay involved in the project may affect LICB's near-term working capital, in particular, its steel operations are factors for concern. ' Hong Leong Investment Bank Research, March 22
This article appeared in The Edge Financial Daily, March 23, 2011.
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