THE time is coming closer for Lion Forest Industries Bhd (Lion FIB) to demonstrate it is able and willing to fulfil its role as a contributor of cashflow for the still highly indebted Lion group.
Lion FIB will be announcing its fourth quarter results next month. There is much anticipation now that it will announce a final dividend comparable with its interim dividend.
Three weeks after it released its third quarter results, the company announced an interim tax-exempt dividend of 7.5 sen. This has gone ex-date (you will not be entitled to the interim dividend if you buy the shares now) and will be paid next week.
Affin Securities has projected that Lion FIB would declare a final dividend of 6.5%, making it a total of 14% for the financial year ended June 30, 2004. The yield would rise to over 6%. Some fund managers believe the final dividend could be even higher.
The dividend projection by Affin was made in a report for its “Look East Malaysia” conference last week.
The chiefs of some 17 public-listed companies, based in Sabah and Sarawak, trooped to Kuala Lumpur to make presentations to a large group of fund managers.
A fund manager said this was the first time in his recollection that he saw Lion FIB participate in a meeting with fund managers. It suggests the company has an investment story to tell.
There are three reasons for believing there is a bumper dividend ahead.
Firstly, Lion FIB was promised to Lion group's creditors and shareholders as one of the corporate vehicles that would contribute cashflow for the benefit of the group. It will do so by distributing the bulk of its free cashflow in the form of dividends.
Secondly, paper prices have been recovering since late 2002 and that has continued.
Affin said paper prices had moved up from US$560 a tonne in 2002 to US$650 tonne. It is believed the brokerage was referring to prices in Malaysia.
That price rise has continued this year, and would have boosted Lion FIB's fourth quarter earnings.
Thirdly, the company is generating a higher level of cashflow this year. This is underpinned by higher earnings. Up till the third quarter, Lion FIB had earned RM21.2mil, up from RM8.8mil for the same period last year.
With the higher paper prices, fourth quarter earnings should be at least slightly better than that in the third quarter. That would take the net profit to about RM30mil for the whole year. Adding back depreciation and other non-cash items, which totalled about RM60mil a year, the operating cashflow could come up to RM90mil for the 2004 financial year. Lion FIB has no debt.
That provides the means for Lion FIB to increase its dividend. The cashflow enables the company to issue a dividend more than twice what fund managers are expecting. It is, however, curbed from paying out 100% of its cashflow by two factors.
Firstly, its commitment to bankers is to dividend up all the cashflow after providing for capital expenditure (capex). For Lion FIB, the capex is mainly to fulfil its obligation for replanting its forest; it does not need to spend more money either on the paper mill or on additional forest concessions.
Secondly, as Lion FIB had incurred losses in the past, it is allowed to pay dividends up to the level of its profits only, and that is much less than its free cashflow. So, the expectations of a 14% dividend for the full year are based on the company registering EPS of 14 sen.
Such a position of cashflow exceeding dividend payout will result in an accumulation of cash in the company at the same as it raises dividends, an enviable situation to be in.
The expectations for a higher payout naturally assume the group will not resort to any more inter-company loans to its parent company, Lion Industries Corp Bhd (LionInd). A loan of RM100mil was made by Lion FIB to LionInd based on a proposal last year. It is hoped the group will revert to the fair means of streaming up cashflow, which is by way of dividends for all shareholders.
In terms of Lion FIB's prospects for earnings growth, paper prices could conceivably rise further on the strength of strong economic growth in China and India. Paper prices have risen less than many other commodities even though prices of the latter have come off their recent peaks
Lion FIB has long been viewed as an asset play. Its net tangible assets are RM6.70 a share, which is much richer than its share price of RM2.32. It has a forest concession of more than 700,000 acres in Sabah. That alone could be worth more than the company's market capitalisation of RM470mil. Investors are getting its huge paper mill for free. The mill was built at a cost of over RM1bil.
The forest concession is stated in Lion FIB's books at a value of RM320mil. In an acquisition that can be used for comparison, Permaju Industries Bhd said in April that timber rights of about 216,000 acres, also in Sabah, were valued at RM230mil. Lion FIB's concession is much larger than that.
That value has not surfaced in its share price so far, but shareholders can take heart that a higher dividend payout will soon be realised.
In an industry of strategic economic value, Lion FIB has managed the company well, especially as companies like Asia Pulp and Paper had faced critical financial difficulties.
Yet, Lion FIB is not on the radar screen of many fund managers. Its briefing session at the Affin conference was poorly attended.
Most of the fund managers went to the sessions given by Ta Ann Holdings and Bintulu Port Holdings that were held at the same time. These companies satisfy the conservative risk appetites of fund managers.
They may have a change of heart if Lion FIB lives up to its word to distribute its cashflow. A further catalyst will crystallise when it makes share placements to meet the rule of a minimum public shareholding spread of 25%. That would catch the interest of analysts and fund managers. Currently, LionInd owns 83% of Lion FIB.
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