It has been excited to read the Annual Report of LSteel. The reports have categorized management analysis in 3 aspects:

1. Financial Performance
2. Operational restructuring exercises
3. Outlook and turning greater in 2017

Financial Performance

FINANCIAL HIGHLIGHTS

                                                                                                      2011      2012       2013    2014      2015      2016

1. Financial Highlights of Statement of Profit or Loss

Revenue (RM mil)                                                                           273.4     283.4     258.7      234.7    153.7     167.3

EBITDA (RM mil) ^                                                                         16.1        4.6         18.8       0.5        7.6        18.8

Profit/(loss) before tax (RM mil)                                                         2.9        (11.2)      2.4        (14.7)    (5.7)      7.6

Profit/(loss) after tax (RM mil)                                                          (1.5)       (10.6)      0.5       (12.0)     (3.5)      6.5

Earning Per Share (Sen)                                                                                                                                     5.3

2. Financial Highlights of Statement of Financial Position

Total assets (RM mil)                                                                    235.0      276.1      263.5    254.6     249.3    245.2

Total borrowings (RM mil)                                                            107.0      123.3      121.7     107.0      90.6      70.1

Shareholder equity (RM mil)                                                          95.1       116.3      116.5     120.3      122.6    131.9

• Revenue surge 8% increase to RM167.3 million compare with revenue of RM153.7 million in 2015
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• Profit before tax is RM7.5 million, strong turnaround from a net loss of deficit RM5.7 million in previous year.
•  
• Earning per share is 5.3 sen and Net tangible assets per share is RM1.03.
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• Interest expense reduce RM20 million, gearing ratio improve as management taper off reliance on borrowing.
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• The earning before interest, tax, depreciation and amortization (EBITDA) has strengthened from RM7.6 million to RM18.8 million in 2016 as a result of improved profit and reduction in depreciation and interest expense.
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• Net cash position is also a strong turnaround, soaring 108% to RM312,550 compare to a RM4 million deficit last year
•  
• By overseeing the concrete improvement of the above, reissue of Dividend in 2017 is not a dream now.

Operation Review

1. By operational restructucring, the group strive to enchance production capacity and optimization of resources. The introduction of new product ie steel reinforcing bars and wider range of steel pipes are having now production mode . The group has expansion and diversification plan to rolling out more new range of product for the construction and furniture industries. Lsteel is planning to reactive its existing hot rolling mill in Kuching to cater for growing demands of steel product locally and internationally. The group has now exported certain range of steel product to Singapore.
2. The provisional imposition of safeguard duty has been confirmed now for selected type of Steel Reinforcing Bar (Rebar),  deformed bar in coil and steel wire rod to be extended for another 3 year from April 2017. This is augur well for the group as it embarked on increasing its range of Rebar product. The imposition of safeguard duties are expected to reduce importation and help to grow the domestic steel industry. This will boast the revenue and profit of Lsteel for next  few years.
3. The major raw matrial for existing steel pipe product are using HRC and CRC. Lsteel can source this material freely from international market with cheaper price due to the local monopoly producer, Megasteel already shut down on its production which signaled the end of monopoly of HRC domestically.
4. Lsteel was granted SIRIM for its plant in Kuching, Lsteel also apply SIRIM for its steel product at the Sungai Bakap plant. These certification are independent assurance of the reliability and quality of the group product.
5. In line with strategist and business expansion, Lsteel now has 4 plants scattering through out Penang 2 plants ie Bukit Tengah and Sungai Bakap, Kapar, Selangor and Kuching. The Sungai Bakap is a new plant and now having production for Rebar and wider range of steel pipe product. Kapar plant now under construction of new office building and production floor are ongoing. Lsteel will have increase production capacity to meet growing domestic order especially in the south-central region of penisular Malaysia. This help to minimize logistics for transportation to customer in the region.
6. Lsteel has trading and processing mineral segment which majority catering for China market. The international demand of iron ore is promising since last year. The price has surged from it low from USD 38 to USD 95 in January/February 2017 and gradually come down to USD 60-70 recently. On the average, 20,000 mt of minerals such as manganese ores are exported monthly to China. Notwithstanding economic slowdown in China, the group has been able to secure consistent orders, thus gaining a strong foothold in the China market. Lsteel is remains confident that the market will improve as the price of iron ore continue to rise moving forward.

OUTLOOK

1. Signs of improvement in the global economy are beginning to become more evident. Steel prices appear to be on the road to recovery. The outlook for the Malaysian economy is improving and projected to expand between 4.3% and 4.8% in 2017 according to Bank Negara Malaysia. The local steel demand and consumption will continue to move uptrend given government various stimulus plan such as safeguard duty and anti dumping policy. The property sector is also gaining pace to recover gradually.
2. Following last year’s G20 Summit in Hangzhou, China, China government had promised to reduce its steel capacity by 45 Million mt in 2017 to tackle the steel oversupply problems. Other initiatives such as RM260 billion of development expenditure under the 11^th Malaysia Plan (2016-2020),  preferential electricity tariff, Buy Malaysia 1^st Policy, Foreigner Second Home Policy and promotion of industrialized Building System in the construction industry have helped to stabilize and boost demand for local steel producers.
3. These public policy measures, coupled with stronger demand from the construction, renovation and furniture industries, are beginning to impact the steel manufacturers and traders like Lsteel in a positive manner and augur well for local steel players.
4. The demand for iron ore is stable. Lsteel foresee that continued increase in price of manganese would benefit the group in the foreseeable future and improve contribution from the trading of minerals segment. Moreover, there are very few trader of iron ore in Malaysia, the group will be able to leverage on its strong foothold in China to bolster sales of minerals.

CONCLUSION

The management are optimistic that this positive momentum will be sustained and persist in the current financial year.As coverage on The Star Paper, the first quarter ended March 31, 2017, MD,Tan said the group expected performance to improve by a double-digit percentage over the same period a year ago. Looking at the current price of Lsteel of RM0.42 which only trading at 0.4 x from it NTA value of RM1.03. It is really a  undervalue gem. By looking at its embarkment in the Long Bar business and the current Safeguard duty imposition, the reasonable price shall be double from its current price. Lsteel  also expect this segment of the business to start contributing positively in 2018.
 

Bali

1-5-17