言所欲言

Splitting the steel and retail business will unlock value at Lion Diversified

By TEE LIN SAY

MANY perhaps do not have the nerve to stomach the ups and downs of the market. Under such circumstances, it would be wiser to be an investor, and invest only in value. An example of value would be Lion Diversified Holdings Bhd. 

Its downside is rather limited considering its bright financial outlook and the booming retail trend in China. 

To wrap up its appealing points, firstly, there’s its strong financial results, which have continued to buoy sentiment on the company. Secondly, there’s the strong prospects of its Hong Kong listed retail chain, Parkson Retail Group Ltd. Also, there’s the impending separation of its steel and retail business into two different companies. 

Financials-wise, Lion Diversified’s revenue for the six months ended December 2006 surged 50.5% to RM2.44bil. Pre-tax profit surged 41.3% to RM715mil while net profit jumped 29.1% to RM590.6mil. This translates into net earnings per share of 85.37 sen for the six-month period. 

A good part of Lion Diversified’s results were contributed by the sterling performance of its 55% owned subsidiary Parkson.   

Parkson posted profit growth of 73% in the fourth-quarter to December 2006 as consumer spending accelerated in the world’s fastest growing major economy.   

Fourth-quarter net income rose to 160.8 million yuan from 93.2 million yuan a year earlier. Revenue doubled to 870 million yuan from 423million yuan. On a full-year basis, Parkson’s 2006 full-year profit surged 86% to 461 million yuan.   

Says ICapital: “As the price of Lion Diversified drops, one should look at its value. This is being reflected by its good set of results, a strong balance sheet, the proposed splitting into two listed companies and most importantly, the immense potential of Parkson in China and Vietnam, both economies that can grow rather independently of the US economy. As its share price drops, its intrinsic value is increasing gradually.”   

The deal 

Recall that in October last year, the Lion group announced a proposal where Lion Diversified would inject its Parkson retail businesses, both domestic and abroad, into another group subsidiary, Amalgamated Containers Bhd (ACB), in return for shares and loan stocks. Subsequently, Lion Diversified would distribute to shareholders all its shares in ACB. 

With this proposed corporate exercise, ACB would be the majority shareholder of Parkson in China. The retail sector is a sought after industry in China, with high growth seen at least for the next 10 years. 

ACB is listed on the main board of Bursa Malaysia and is mainly involved in manufacturing and trading steel and iron products, manufacturing and distributing automotives and components etc.   

The splitting up of the steel and retail business is seen as an exercise to unlock value at Lion Diversified. With the demerging of the Parkson business from the company, the cash-rich Lion Diversified will be viewed purely as a steel company. 

Under the proposal, Lion Diversified has valued its interests in the Parkson retail operations at RM4.3bil. This comes mainly from its 55% stake in the Hong Kong-listed Parkson Retail Group Ltd (PRG), which is valued at RM4.03bil.   

The remaining RM270mil is the value attributed to Parkson Malaysia’s operations as well as several Parkson franchise department stores in China. 

Lion Diversified will inject these Parkson assets into ACB for RM4.3bil in return for 3.8 billion new shares in ACB at an issue price of RM1 each plus RM500mil nominal value three-year 3.5% coupon redeemable convertible secured loan stocks. Lion Diversified will also acquire from Lion Corp Bhd another 42.32 million shares in ACB for RM35.12mil cash. After the two exercises, Lion Diversified will end up with a 99.16% stake in ACB or a total of 3.84 billion shares of RM1 each. 

Better Prospects 

Although Parkson China’s retail business is the main attraction, Lion Diversified is also involved in property development and management, manufacturing of computer and related products, and via its investment in Lion Corp, the steel related business. 

“Such a structure has greatly reduced the value that is to be found in Parkson China, as can be seen by the vastly different valuations given to Lion Diversified and Parkson’s listing in Hong Kong. From the view point of the shareholders of Lion Diversified, separating the two major businesses of retail and steel makes sense,” says ICapital.   

The investment advisory newsletter says that the restructuring will also allow Lion Diversified to be more focused on the steel business, which is highly capital intensive and cyclical.   

“The RM850mil direct reduced iron (DRI) plant under Lion Diversified will be coming onstream in the first quarter of 2007. As the output will be used internally, full utilisation of this 1.5 million tonne plant is expected by 2008,”   

“Since the Lion group has been operating profitably in a similar but smaller DRI plant in Labuan, the new DRI plant in Banting should be profitable soon,” says ICapital. It adds that as shareholders of Lion Diversified will be receiving ACB’s shares for free, the prospects of ACB are important to the current valuation of Lion Diversified.   

“The disposals will allow Lion Diversified’s current Parkson business in Malaysia, Vietnam and China to be grouped under ACB. With this, ACB will offer investors an unusually exciting exposure to the fast growing consumer spending in Asia,” it says.   

Icapital is of the view that Parkson’s operations in China will continue to see rapid growth. Within a year or 2, Parkson should have five to six stores in Vietnam, a country growing at 8% with a population of 80 million. 

Meanwhile, Lion Diversified has entered into conditional agreements to subscribe for 200 million 5-year redeemable cumulative convertible preference shares of 1 sen each to be issued by Megasteel Sdn Bhd for RM200mil cash.   

It is also proposing to acquire 60 million shares or a 10% interest in Megasteel from Khazanah Nasional Bhd for RM138mil cash.   

Retail revival 

In China, Parkson hopes to add six stores annually across the mainland for the next three years to ride growth in Asia’s second-largest retail market.   

The China Daily reported that more than a 10% annual expansion will help Parkson sustain growth in same-store sales an important industry benchmark at between 15 and 17% over the same period.   

Nonetheless, while the industry is huge, it remains fragmented with competition intensifying as players in other segments from Wal-Mart Stores Inc to Carrefour SA pile in.   

“In mature markets such as the United States, the top 5 or 10 retailers command about 40% market share. In China that figure was less than 10%, with Parkson leading the fray with a 2% market share,” Parkson managing director Alfred Cheng was quoted as said.   

Cheng said that Parkson hopes to add six stores on average per year. At the moment, Parkson has announced the signing of five leases this year.   

The five leases will go to Beijing, Shanghai, Chengdu and Xi’an in which Parkson already has stores and the affluent city of Hangzhou in East China.   

On Nov 17, Parkson said that it would pay 315.6 million yuan to buy control of two “Parkson“ branded stores in southwest China’s Yunnan province to improve profitability.   

Cheng added that 15% to 17% same-store sales growth for the next two to three years is still sustainable