This article first appeared in The Edge Malaysia Weekly, on March 7 - 13, 2016.
LITTLE-KNOWN Leon Fuat Bhd is often mistaken for a steel producer. But, as executive director Calvin Ooi Shang How reiterates in an interview with The Edge, the company does not manufacture steel. Thus, it is not in the same boat as steel makers, especially upstream players, which are suffering because of an influx of cheap imports from China.
Leon Fuat is involved mainly in the trading and processing of flat and long steel products.
Ooi believes investors lump the company with other locally listed steel manufacturers that operate in a harsh environment, which explains the scant interest in its stock.
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.
“Our focus is carbon steel; most of it is mild steel and the rest is stainless and alloy steel. We also have in-house facilities to undertake the cutting, slitting, shearing, bending and finishing of products,” explains Ooi.
With its operations in Shah Alam and Sungai Besi at the moment, Leon Fuat has three major expansion plans to increase its production capacity, improve its efficiency and create a new income stream.
According to Ooi, the company completed the construction of a new warehouse in the Port Klang Free Zone at the end of last year. Once approved by the local authority, the warehouse will commence operations, representing the first step in the company’s effort to explore export markets.
“We will have storage space for goods imported from abroad, which can then be re-exported to other countries in Southeast Asia. We can also supply local industries that are tax-exempted so that we can save on unnecessary import duties, not to mention the fact that our prices will be more competitive,” Ooi says.
The company is also building a new processing plant on a 130,680 sq ft piece of freehold industrial land in Shah Alam, directly opposite its headquarters, Wisma Leon Fuat. Expected to be ready in April, the plant will double its existing capacity.
“A capex (capital expenditure) of RM9 million was allocated for last year and this year. We will have better production flow in the new space, which will push up our output,” says Ooi.
Leon Fuat also hopes to enter the steel pipe manufacturing business in two to three years. This diversification will be implemented at its new warehouse and processing plant in Kapar, Selangor.
“We have been buying steel coils and other steel products. That’s why we want to diversify into the end products that are produced by these raw materials. In fact, some of our regular customers also buy steel pipes, so if we can supply these at a reasonable price, that would be a new business opportunity for us,” remarks Ooi.
Excluding land cost of RM31.7 million, some RM70 million will be used as capex and working capital for the venture over the next two to three years, he points out. “We are hoping to commence operations by the end of 2017 or early 2018. We foresee steel pipes becoming our third core business and one of the big income sources for the group in the future.”
With the higher capex, Ooi expects Leon Fuat’s gearing ratio to rise from the current 0.7 times to 1.1 times, which would exert pressure on its cash flow. “We hope the gearing will be reduced once the new business and plant kick in. This is a stage that we need to go through.”
Since making its debut on the Main Market of Bursa Malaysia in June 2013, Leon Fuat’s share price performance has not been impressive, which Ooi believes is mainly due to misperception. The stock was trading at 46.5 sen last Thursday — below its initial public offering price of 60 sen and par value of 50 sen. Its price-earnings ratio is at an undemanding 7.8 times and its price-book ratio is 0.6 times.
Ooi insists that Leon Fuat’s shares are undervalued. “I don’t think the share price reflects the actual value of our company. It is because of market sentiment and misperception — something that is beyond our control. What we can do is deliver better results and earn investors’ confidence.”
In its financial year ended Dec 31, 2015 (FY2015), Leon Fuat’s revenue grew 3% from a year ago to RM505.4 million, thanks to higher tonnage sales in both its trading and processing divisions. However, the lower average selling price of its steel products and higher operating and finance costs have eroded its profit margin.
The company’s net profit declined 33% from a year ago to RM18.4 million.
Commenting on the company’s earnings performance, Ooi says management is cautiously optimistic that Leon Fuat will fare better in FY2016, although growth, if any, will not exceed 10%.
The 36-year-old, who is the son of managing director and co-founder Ooi Bin Keong, nephew of executive directors Ooi Seng Khong and Ooi Kong Tiong, and cousin of executive director Ng Kok Teong, was appointed to the board in June 2012.
That Leon Fuat’s shares are thinly traded could also be due to a narrow public spread. The Ooi family controls more than a 70% stake through Leon Fuat Sdn Bhd while Lembaga Tabung Angkatan Tentera, which used to be the second largest shareholder with a 5.5% stake, has exited the company.
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