Leon Fuat sees strong steel demand from palm oil, semiconductor industries

This article first appeared in The Edge Malaysia Weekly, on February 21, 2022 - February 27, 2022.
Ooi: Theoretically, after a normalised year in FY2022, our earnings momentum should pick up again from FY2023. (Photo by Leon Fuat)

Ooi: Theoretically, after a normalised year in FY2022, our earnings momentum should pick up again from FY2023. (Photo by Leon Fuat)

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AS rubber glove manufacturers accelerate investment in new manufacturing facilities to meet growing demand amid the Covid-19 pandemic, steel maker Leon Fuat Bhd has been an indirect beneficiary. The group, which specialises in rolled long and flat steel products, has seen increased demand for steel products to support new production facilities.

As glove manufacturers start scaling down their expansion plans, however, Shah Alam-based Leon Fuat is banking on new orders from palm oil millers and semiconductor companies to maintain its growth momentum.

“While the demand for steel from the glove manufacturing industry may have slowed down, activities in other industries that we serve, such as palm oil and semiconductor, are still very active. We continue to receive strong demand [for steel products] from these sectors,” executive director Calvin Ooi Shang How tells The Edge in an interview.

Leon Fuat has been supplying its steel products to customers in palm oil-related industries locally and overseas, including in Indonesia. The group also serves local oil and gas (O&G) companies that are bidding for projects across the world.

“The one sector that we are particularly excited about is the semiconductor, or electrical and electronics (E&E), sector. The increase in demand for semiconductor products has led to various expansions in the local E&E sector, and these expansions will indirectly increase the consumption of steel products as well,” says Ooi, 43, who was appointed to Leon Fuat’s board in June 2012.

“We have seen an increase in orders from the semiconductor sector over the past two years, and we expect their orders to remain strong in the coming years.” Currently, the group has more than 3,000 active customers from various industries.

Ooi is the son of the company’s co-founder and executive deputy chairman Datuk Seri Ooi Bin Keong; nephew of group managing director Ooi Seng Khong and executive director Ooi Kong Tiong; and cousin of executive director Ng Kok Teong. The Ooi family controls about 64% of the group through its private vehicle Leon Fuat Holdings Sdn Bhd.

Leon Fuat is expected to post a record net profit for the financial year ended Dec 31, 2021 (FY2021), after chalking up a net profit of RM106.914 million in the first nine months — more than 10 times higher than the RM10.465 million recorded in 9MFY2020.

“Overall, 2021 was a surprisingly good year for us. In fact, in terms of earnings performance, FY2021 will be a record year for Leon Fuat since it was established. It was even better than our performance in FY2008, when we experienced a surge in steel prices during the Beijing Summer Olympics,” Ooi says.

The improved performance is attributed mainly to a higher overall average selling price (ASP), which rose 44.1% year on year, and higher overall tonnage sales, which were up 12.4% y-o-y. A check on AbsolutelyStocks shows that Leon Fuat’s net debt position stood at RM367.4 million as at Sept 30 last year.

“Last year, steel players, including Leon Fuat, enjoyed a good year. Given the pandemic, nobody was expecting business to be good. But, as it turned out, there was a shortage of supply and increased demand for steel materials,” says Ooi.

He adds that the increase in steel demand and supply chain disruptions, including shipment delays, had led to a shortage of steel in the market. As a result, steel prices have shot up more than 100% since 2020.

Apart from the rubber glove sector, the palm oil industry has also been doing well amid rising crude palm oil (CPO) prices. Likewise, the O&G industry has staged a strong recovery with higher crude oil prices.

Returning to a normalised year

Still, Leon Fuat has been able to pass on higher steel prices.

“As a stockist, we do enjoy additional profit margin on the stock we kept at a cost relatively lower when prices were on an upward trend. But, of course, there are still risks when prices come down. So, we must manage our purchases carefully,” says Ooi.

He observes that the hike in steel prices is a reason for the delay in the execution of new projects or expansion plans in some of the industries that Leon Fuat is serving.

He says that once steel prices stabilise, it may encourage the affected industries to resume plans that were put on hold earlier.

“If these plans are to go ahead, it will benefit our business directly and indirectly. Meanwhile, we are hoping our steel pipe manufacturing division will make a higher profit contribution to our group this year,” says Ooi.

Shares in Main Market-listed Leon Fuat have gained 76% over the past year to settle at 98 sen last Wednesday, giving it a market capitalisation of RM335.89 million. The counter is currently trading at a historical price-earnings ratio (PER) of merely 2.5 times, offering a trailing 12-month dividend yield of 2%.

Meanwhile, Leon Fuat expects steel demand, steel prices and the group’s earnings performance to normalise this year.

“Once the steel supply is back to a normal level, we don’t expect a further price hike. Of course, Covid-19 is still affecting a lot of countries, including those that are producing iron ore, which could be another issue for steel supply. But, for now, our view is that most likely everything will normalise this year,” says Ooi.

“Hopefully, we can see a clearer picture after the first quarter of 2022. Having said that, we are still expanding our steel pipe manufacturing operations. So, theoretically, after a normalised year in FY2022, our earnings momentum should pick up again from FY2023.”

Steel pipe producer Hiap Teck Venture Bhd announced a RM3 billion expansion plan last November for its associate EasternSteel Sdn Bhd, which includes a venture into the hot rolled coil (HRC) business, by putting up a new plant at the latter’s existing 1,209-acre Kemaman site in Terengganu.

Ooi believes this is positive news for Leon Fuat, as it essentially means there would be an additional HRC supplier in the market. The company ventured into the steel pipe manufacturing business about three years ago. As for its trading division, HRC is the main product among the range of flat and long steel products.

Since Megasteel Sdn Bhd, which is part of tycoon Tan Sri William Cheng Heng Jem’s Lion Group, stopped producing HRC, local steel traders have been sourcing it from countries such as Vietnam, Thailand, Indonesia, China and India.

“When we purchase steel from overseas, we need to plan ahead. Normally, the lead time is two to three months. If we can purchase steel from local manufacturers, it will allow us to have better procurement plans, as the lead time will be shorter than importing and, therefore, we can manage our working capital and cash flow more efficiently. Thus, we certainly welcome this development,” says Ooi.

 

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