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Diversified customer base a hedge for Leon Fuat

Diversified customer base a hedge for Leon Fuat

26 Jul 2023

DURING the Covid-19 pandemic, Shah Alam-based metal and steel supplier Leon Fuat Bhd was an indirect beneficiary when the rubber glove makers were expanding their manufacturing facilities.

Subsequently, the group also benefited from rising crude palm oil (CPO) prices and the global chip shortage, which had also prompted the palm oil millers and semiconductor companies to expand.

While some players in these industries have started to scale down their expansion plans, Leon Fuat Bhd executive director Calvin Ooi Shang How points out that the group continues to see plenty of opportunities from other areas, such as data centres, oleochemicals and warehouse-expansion projects.

“One of Leon Fuat’s biggest strengths is our diversified clientele base of more than 3,000 customers from various industries. When one industry slows down, another industry will start picking up. Other than data centres, oleochemical factories and warehouses, we notice that some oil and gas (O&G) players and machine manufacturers have remained quite active too,” he tells The Edge in an interview.

Shang How, who was appointed to Leon Fuat’s board in June 2012, acknowledges that although the group is not directly involved in projects such as the construction of data centres, it could supply its steel products through the contractors.

“Likewise, we are also indirectly involved in certain parts of infrastructure projects such as the Johor Baru–Singapore Rapid Transit System (RTS) project, by supplying some of our steel products to the contractors.

“Meanwhile, some construction companies from China are gradually gaining momentum in Malaysia again, which may be beneficial to local industries in the form of new opportunities to supply,” he elaborates.

Shang How believes Malaysia’s securing of RM170 billion worth of investment commitments after Prime Minister Datuk Seri Anwar Ibrahim’s visit to China in April may have a positive impact on local industries in the coming years.

Shang How, 44, is the son of Leon Fuat’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. Its top 30 shareholders include Chin Hin Group Bhd founder Datuk Seri Chiau Beng Teik (0.43%) and low-profile savvy investor Lim Pei Tiam (0.86%).

Over the past five decades, Leon Fuat has been primarily in the business of trading and processing steel products, specialising in rolled long steel and flat steel products.

In 2019, the half-century-old steel company ventured into the welded steel pipe manufacturing business by setting up a downstream production plant in Port Klang, Selangor.

Today, Leon Fuat’s flat steel products consist of coils, plates, sheets as well as welded tubes and pipes, while its long steel products include bars, rods, shafts, sections, angles, seamless tubes and pipes.

Typically, long products are used in the construction and civil engineering industries, whereas flat products are used as raw materials for downstream applications in the automotive, O&G, machinery and equipment, as well as other manufacturing sectors.

For perspective, the processing and manufacturing division — collectively referred to as the processing division — contributed 65% of Leon Fuat’s turnover, while the remaining 35% came from its trading division. In total, the group’s revenue hit a record high of RM1.025 billion in the financial year ended Dec 31, 2022 (FY2022).

Chief financial officer Tan Kien Yap highlights that flat products remain the bread and butter for Leon Fuat, making up almost 90% of the group’s revenue from its processing division, as well as accounting for two-thirds of its sales from the trading division.

Leon Fuat’s earnings reached an all-time high of RM135.98 million in FY2021 — thanks to shortage of supply and increasing demand, which resulted in higher average selling prices (ASPs) — before declining 78% to RM29.54 million in FY2022.

‘Inventory write-down unavoidable’

Tan notes that Leon Fuat had made inventory write-downs of RM12.93 million in FY2022 to comply with the Malaysian Financial Reporting Standard 102, which states that inventories need to be measured at a lower cost and net realisable value.

“The inventory write-down is something that we cannot completely avoid when the selling prices have declined significantly within a short time frame. Were it not because of the write-down, our bottom line in FY2022 would have been higher,” he says.

Tan adds that with the write-down, the cost of the affected stocks will come down; thus, when Leon Fuat is able to sell those stocks at higher prices, the group will regain some profit.

“On a positive note, our steel stock will not expire. So, we are not in a hurry to clear it. We could wait for the right time to sell our stock at a reasonable price,” he explains.

Leon Fuat reported a net profit of RM10.68 million in the first quarter ended March 31, 2023 (1QFY2023), on the back of revenue of RM233.7 million. As at 1QFY2023, its net gearing ratio was 0.76 times.

“Considering that the steel prices have very much stabilised and barring any unforeseen circumstances, there should not be any significant inventory write-downs in the near future,” Tan remarks.

After a normalised year in FY2022, Shang How believes FY2023 could be a year of recovery for Leon Fuat.

“From our observation, the steel prices remained rather weak in 1QFY2023. We have yet to see a strong recovery on global demand for steel products because we are still waiting for the full impact of the great reopening of China.

“We have been communicating with players in the industry but, so far, they are not overly bullish about the demand outlook. But, definitely, when we talk about declining ASPs, I would like to think that the worst is over. The demand may not be as strong as what we had seen in FY2021 but, for sure, many business industries still need to consume steel. It’s a matter of time until they need to buy more steel products again. Hopefully, we will see a gradual recovery in 2HFY2023,” he says.

Over the last 12 months, shares in Main Market-listed Leon Fuat have declined 12% to close at 49.5 sen last Thursday, giving it a market capitalisation of RM168.8 million. The counter is currently trading at a historical price-earnings ratio of 10 times.

Shang How declines to comment on Leon Fuat’s share price performance, saying instead that the group will be focusing on the fundamentals and hoping that investors can see value in the company.

“Realistically, it’s not likely for us to revisit our record-high profit of RM135.98 million in the near future. The mega infrastructure projects are still moving rather slowly. So, if I am being honest, there aren’t too many catalysts for the construction and steel industries.

“We will focus on strengthening our business fundamentals. Despite the soft market, we are still expanding our steel pipe factory; so, we are investing for our future. We need to be prepared for the next big wave,” he adds.

Steel pipe project entering second phase

The first phase of Leon Fuat’s steel pipe plant in Port Klang has four production lines — with an installed capacity of about 5,000 tonnes per month. In terms of utilisation rate, the company is currently running at 60%.

Notably, it has embarked on the second phase of its steel plant project, which is expected to be fully commissioned in the first quarter of next year.

Its marketing manager Ooi Pui San says the new equipment intended for the second phase could give the group an additional capacity of around 8,000 tonnes per month.

Excluding the land cost of RM33 million, Leon Fuat had invested about RM70 million in Phase 1 and RM95 million in Phase 2.

“The size of steel pipes to be produced in Phase 2 will be bigger than that of Phase 1, so there is no concern about overcapacity, because we are essentially expanding our product range to serve our regular customers and new clients,” she says.

It is learnt that Leon Fuat’s main competitors in the steel pipe business include Hiap Teck Venture Bhd, Choo Bee Metal Industries Bhd, Melewar Industrial Group Bhd and Pantech Group Holdings Bhd.

Pui San, who is also Shang How’s cousin, says the steel pipe manufacturing business, which is parked under Leon Fuat’s processing division, contributed about 10% of the group’s revenue in FY2022.

“Currently, our main focus is on local demand, while we are continuously exploring opportunities abroad,” she says. 

Source: The Edge Malaysia