Tuesday, February 10, 2015

Dissecting the SGX Metal Companies

Are you ready for some noobish stock evaluations? Here we go!

I stumbled upon this old post by SG Stocks Pick done back in 2012. It seems to be missing Nam Lee, so I'll be adding it in and going through my thought process openly here as an open thought exercise for those curious to see. But sometimes when you look at all the stuff you have to go through, you get so lazy...


Time to stop being lazy and do a more legit analysis like some of my more esteemed peers! Money is at stake here. MY MONEY!


So let's get down to business!


Based on Market Cap, I feel that all the companies are actually very similarly sized between 70-160 Mil. Free float looks pretty good too, between the 20-50% range.


Now here I am looking at their balance sheet. The winner for the ugliest balance sheet is BRC Asia. Not only do have pretty high gearing, payables (good debt IMO) also does not form a large part of their total debt. Compare this to Lee Metal that has much higher gearing, but also has a very high percentage of payables making up that debt. HG Metal has the same problem with not much payables making up its debt.

The cleanest balance sheet in my opinion is actually Asia Enterprises, followed by a tie between Hup Steel and Nam Lee. Asia Enterprises has very low gearing, most of its non-existent debt is payables and it has plenty of cash sitting around. Hup Steel similarly has very low levels of debt, most of which are payables, but it does not have as much cash lying around as Nam Lee does. Nam Lee however has higher overall debt.

I know some might disagree with me, but I really like seeing a clean balance sheet with very little debt. A company with no debt is not an easy company to go bankrupt. A company with plenty of cash also is able to tide through tough times without much problems. Finally, a company with no debt can massively leverage itself up when an opportunity arises!


Looking at HG Metal, they have the poorest margins, and by far. It is no wonder they are operating currently at a loss.

Hup Steel is the clear winner in this category, with Lee Metal and Nam Lee performing reasonably well too.

Interestingly, I believe that Gross Profit is a very powerful indicator about business strength, branding, efficiency and overall competitiveness. I think fat gross profit margins are a clear advantage to the companies that have them.


After looking at company fundamentals, HG Metal is definitely out because they cannot even turn a profit, most likely due to their horrible margins.

BRC Asia is next to be eliminated. They have the weakest balance sheet and a mediocre gross profit. Unfortunately, Lee Metal has to go too in my books. The amount of debt they hold is not something I would like to be stuck with. More liabilities than equity? No thanks. Valuations have got to be pretty tempting to catch me with this guy.

That leaves us with just Asia Enterprise, Hup Steel and Nam Lee. Let's look at their valuations.

Based on P/B, they are actually all trading very tightly around each other, between 0.6 and 0.66. Not very useful here.

However, based on P/E and EV/EBITDA, I think the answer is pretty clear who has the best valuation. Nam Lee clearly is the winner.

Although Lee Metal might be fundamentally weaker than both Asia Enterprises and Hup Steel, it does have an infinitely more attractive current valuation than them now. With low P/E and EV/EBITDA ratios, Lee Metal is actually very nicely priced even though it is a bit more "risky" than the other 3.

In conclusion, if I were to invest into the companies listed on the SGX in the metals industry, I would invest in Nam Lee and Lee Metal.



Oh, that was a pretty tiring exercise for me to do, but I hope it gives you a taste into my methods. It isn't comprehensive and conclusive, especially since I don't care about the specifics of each company, ie. who is their CEO and what they plan to do. However, I've already resigned to my fate that this is the style and rough level of depth that I would like to stick with and I am comfortable working at.

Sometimes I go in deeper and look at Free Cash Flow and calculate the whole complex formula for Shareholder Yield. Other times I compare certain metrics to it's own historical metrics instead of its peer group in real-time.

There are a million ways to go about doing your analysis and setting up rules and screens for yourself. I don't believe that any particular way is the secret ultimate one true way. However, I do believe that certain metrics are more useful than others especially for a certain kind of style. I am just sharing my style, since some people are curious why I look at some really weird companies from time to time!

3 comments:

  1. Hi, got money got honey,

    It might be a good idea to ask why some companies have better margins and "numbers"

    Lee metals is moving from a stockist/ supplier to a manufacturer and fabricator. Hupsteel is developing its industrial property etc...

    There might be a reason why a number is good or bad. Just my 2 cents!

    Metal company that is interesteding include sin ghee huat if clean balance sheet is what u looking for

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    Replies
    1. Hi SI,

      Yes, that is true, the mix of activities can shift around the margins quite significantly. However, I don't know too much about the industry, that's why I used GP as a broad brush. Definitely is not as detailed and missing out on certain angles, but I think it highlights quite well which companies might be in for a squeeze if they can't push up their margins!

      Are you from the metal industry? Sin Ghee Huat has a beautiful balance sheet! Good margins too, but valuations are quite fair I feel. Definitely one for the watchlist to pick up in price weakness. Thanks!

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    2. LOL, GMGH

      I am not from the Metal industry, It started with Sin Gheet Huat and then I move in to others as peer comparison when I am researching like you on metal companies to buy.

      In the end, I ditched SGH for Lee metals. But I bought early, paper losses now.

      Do look around, and update.

      Lee metals' low PE will not be repeated, since it include one-off property development gains for this year.

      Delete

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