MAIN-Market listed Leon Fuat Bhd sees itself as an intermediary to address the gap between steelmakers and end users.
"Usually steelmakers have to produce and sell in large bulks to achieve cost efficiency, but end users normally cannot afford to buy in large quantities. End users also do not have the equipment and facilities to further process steel products.
"So, this is where we come in. We buy in bulk from steelmakers, store in the warehouse and provide steel processing services based on customer demand," Leon Fuat executive director Calvin Ooi told Business Times.
The company is primarily involved in the downstream activities of the steel industry, including the trading and processing of long and flat products. The construction sector is a key user of long steel products, while flat products are mostly consumed by the manufacturing sector.
Thus, companies that provide both long and flat products are likely to be in a better position to mitigate the slowdown in any one of these sectors.
Leon Fuat has proven that its business model could weather these uncertainties. Despite the slump in the global steel market, Leon Fuat's after-tax profit only slipped marginally by four per cent to RM24 million last year.
It now has a strong customer base comprising machine manufacturers, fabricators, construction companies and hardware wholesalers. Leon Fuat is also poised to be one of the beneficiaries of Economic Transformation Programme (ETP).
"Though our current exposure to the construction industry is very little, only 5.3 per cent of total revenue, we will still benefit from the ETP and mega projects.
"Flat products have to be processed and cut to support the overall structure, so customers might not source directly from steelmakers."
Robust private investment and domestic demand are also catalysts to drive the company's growth. For the financial year ended December 31 2012, 98 per cent of the company's revenue came from the local market, while overseas business contributed the balance.
Ooi sees the company growing at a moderate pace, neither too aggressive nor too conservative.
While domestic growth is sufficient to support its medium-term operation, the company will only expand abroad when the opportunity arises.
"We are trying to diversify our product range instead of over-expansion. This is a capital-intensive business; storing materials and providing cutting services to customers, all these involve capital, we have to be careful with every investment," he said.
In line with this strategy, the company has bought a parcel of new industrial land last year and plans to build a new processing plant on the land.
Leon Fuat will spend RM6 million, out of its RM35.6 million initial public offering proceeds, to purchase two new slitting machines as part of its product diversification exercise.
Leon Fuat's revenue of RM274 million for steel processing business in the 2012 fiscal year represents around five per cent of the industry's RM5.8 billion market share.
On trading business, Ooi sees it as synergistic and complementary to processing operations, that enables the company to do cross-selling.