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This article first appeared in The Edge Malaysia Weekly on October 16, 2017 - October 22, 2017

SINCE making its debut on the Main Market of Bursa Malaysia in June 2013, Leon Fuat Bhd’s share performance has been unimpressive. It has been mostly trading below its initial public offering price of 60 sen. Over the years, the company’s management repeatedly blamed this on investors’ lack of understanding of its business as they lumped the company with other locally listed steel producers that operate in a harsh environment.

Leon Fuat is involved mainly in the trading and processing of carbon and stainless steel products. It does not manufacture steel and thus is not in the same boat as steel makers, especially upstream players that are suffering because of an influx of cheap imports from China.

But since early this year, Leon Fuat seems to have gained investor interest. The counter had risen 84% year to date at its close of 85.5 sen last Thursday, which gave the company a market capitalisation of RM265 million. It was trading at a trailing 12-month price-earnings ratio of 4.8 times while its price-to-book ratio was 0.9 times.

Also noteworthy is that Asia Analytica Data Sdn Bhd had, on Sept 19, identified Leon Fuat as a stock with momentum for the fifth time this year, using a proprietary algorithm. The counter hit an all-time high of 88.5 sen on Sept 11.

“It has been four years since Leon Fuat was listed and I suppose investors are starting to realise that the company is fundamentally strong. We are taking a step-by-step approach to growing our company — steadily rather than rushing into fast growth,” Leon Fuat executive director Calvin Ooi Shang How tells The Edge.

The 38-year-old was appointed to the board in June 2012. He is the son of managing director and co-founder Datuk Seri Ooi Bin Keong, nephew of executive directors Ooi Seng Khong and Ooi Kong Tiong, and cousin of executive director Ng Kok Teong.

Calvin acknowledges that Leon Fuat is thinly traded because of its narrow public spread as his family controls more than 70% of the company through Leon Fuat Holdings Sdn Bhd. While the company is open to the idea of increasing its free float, there is no immediate plan to do so.

It is worth noting that despite its heavy investment in expanding and diversifying its business, Leon Fuat has remained profitable in the last eight years, registering an annual profit of between RM17 million and RM27 million.

This year, the group is expected to deliver exceptional earnings after recognising gains and compensation from the compulsory acquisition of its land and buildings in Sungai Besi by the government.

In its first half ended June 30, Leon Fuat’s net profit more than tripled year on year to RM38.8 million while revenue grew 1.6% to RM253.7 million.

To recap, Leon Fuat’s land in Sungai Besi was compulsorily acquired for the MRT’s Sungai Buloh-Serdang-Putrajaya Line. The affected land had housed its steel-processing plant, office and warehouse.

Leon Fuat was compensated a total of RM45.84 million, which contributed a gain of RM21.68 million to its second-quarter financial results.

“To be fair, our share price was already trading higher than our IPO price before the release of our 2Q results. But yes, it started to gain momentum after our results were announced,” says Calvin.

He adds that even if the one-off gain were excluded, Leon Fuat’s actual profit of RM17 million in 1HFY17 was still within expectation, thanks to a better gross profit margin.

On an annualised basis, Leon Fuat should be able to close its FY2017 with a profit of RM34 million (excluding the one-off gain), which is significantly higher than its profitability in the past eight years.

Leon Fuat’s main customers are manufacturers, fabricators, construction firms, hardware wholesalers and retailers. The manufacturing sector is the main consumer of flat steel products while the construction sector is a major user of long steel products.

The group also operates in-house facilities to undertake the cutting, slitting, shearing, bending and finishing of products.

It is noteworthy that Leon Fuat is venturing into the steel-pipe manufacturing business, which is expected to become its third core business and one of its big sources of income in the future.

Calvin reveals that the three-phase steel-pipe manufacturing will be implemented at a new plant to be built on 16 acres in Kawasan Perusahaan Bandar Sultan Suleiman, Port Klang, which is adjacent to the North Port.

“We have submitted our plans to the relevant authorities. There are some indications that they will approve but we will have to wait for the official approvals. Once we get these approvals, we will start the earthworks and construction,” he says.

Calvin points out that excluding the land cost of RM31.7 million, more than RM50 million has been allocated as capital expenditure for Phase 1, mainly for the purchase of machinery and the construction of the factory.

“We are still calculating the production capacity of Phase 1 — it could be somewhere between 3,000mt and 5,000mt a month. The total production volume would depend on how big our investments are in Phases 2 and 3,” he explains.

It is learnt that Leon Fuat has spent about RM23 million on Phase 1, and another RM30 million will be spent from now until the second quarter of 2018.

The construction of the factory, followed by the installation, commissioning and testing of machinery for Phase 1, is slated for completion in the second quarter of next year. Subsequently, it is expected to commence operations in the third quarter.

“In fact, we have a lot of regular customers who have been buying steel pipes from other suppliers. We have informed them that we will be producing these products in the future, and they have been following up on our progress,” Calvin says.

 

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