Home Stock and Shares Lee Metal – A Model of Consistency

Lee Metal – A Model of Consistency

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Lee Metal (593.SI) is a steel supplier and fabricator based in Singapore, with a strong focus on the construction industry. There are at least 4 other similar SGX-listed companies, but Lee Metal stands out as a model of consistency.

Lee Metal has managed to stay in the black and paid dividends in at least the past 8 years, having weathered through the SARS crisis of 2003 and the global financial meltdown of 2009. In fact, 2009 was a record year of profitability for Lee Metal even though turnover declined by nearly a third.

Strengths

Growing multiple pillars of profitability

  • Lee Metal’s resilience can mainly be traced to its expansion in the fabrication business at a time when steel trading suffered in the wake of poor steel demand and weak prices. In 2009, the fabrication segment emerged as a strong second pillar of growth, with operating profit for the segment increasing 17.2% to $26.9 million. This helped offset the 29% decline in operating profit in the merchandising segment to $10.8mil.
  • Management has also made clear strategies to move upstream of the steel supply chain, in particular through investments in a blast furnace and coke production.

Continued construction boom in Singapore

  • Although building activity in Singapore is expected to ease from a record S$30bil in 2009, it is still expected to reach about $28bil in 2010, with major projects such as the MRT Downtown Line in the pipeline. As a major steel supplier in the Singapore market, Lee Metal should at least maintain a similar level of profitability in its single largest market.

Stronger steel prices

  • Largely on the back of demand in China, the World Steel Association forecasts global steel consumption to rebound by 9.2% to 1.206 billion tonnes in 2010 after 2009’s 8.6% decline. This should lead to firmer steel prices, which would benefit Lee Metal’s merchandising/trading business.

Room for further acquisitions

  • Each fully diluted Lee Metal share is backed by 16.5 cents of net cash. With more than S$80mil in available funds, Lee Metal has plenty of leeway in making strategic investments to broaden its revenue base.

Risk Factors or Weaknesses

Strong dependency on the construction industry

  • While Lee Metal has diversified out of Singapore, with Asean now accounting for 75% of revenue, it is still almost exclusively dependent on the construction industry. It does not have a footprint in the supply of steel to the booming offshore and marine industry in Singapore or the increasingly important automotive industry in Thailand. In contrast, close competitors HG Metal and Novo have teamed up with Korea’s heavyweight steel producer POSCO to supply “offshore grade” steel to the offshore industry based around Singapore.

Delay of Indonesian venture and withdrawal from Middle East

  • Lee Metal’s plans for a blast furnace in Indonesia to produce steel billets via its 30%-owned PT Indoferro has been “placed on the backburner” until 1Q2011 in view of the poor economic environment. This is thus a setback in Lee Metal’s long-held plans to move into the upstream steel business. Construction of the furnace is however in progress and payback period will be inevitably lengthened.
  • With the divestment of its 33.3% stake in Readyfix, Lee Metal has also effectively withdrawn from the previously red-hot Middle East market and taken a step back from expanding its geographic market base which is now confined mainly to South East Asia.

High directors’ bonuses

  • Not withstanding Lee Metal’s stronger than expected set of financial results in FY2009, its Executive Chairman and Executive Director, who are also majority shareholders, each received more than S$3mil in remuneration, of which 74% was in the form of bonuses. Director’s fees thus appear to be excessive compared to other listed companies of similar size and profitability.

Conclusion: Target Price at 53 cents

Lee Metal is currently the cheapest steel trader listed in Singapore. Its shares currently trade at a historic P/E of just 4.6, whereas the shares of Hong Kong-based Novo, which has a similar business model, trade at a forward P/E of almost 7.

Assuming a conservative 10% growth in net profits in 2010 and an equally conservative forward P/E of 6, Lee Metal can potentially reach 53 cents in the next 12 months. This represents a 43% upside. BUY.

Key Financial Indicators

Recent Key Developments

  • Apr 2010: Lee Metal disposes of its 33.3% stake in Readyfix Middle East
  • Feb 2010: Lee Metal announces further postponement in the commencement of PT Indoferro’s blast furnace operations from 1Q2010 to 1Q2011
  • Nov 2008: Lee Metal invests in 33.3% stake in Readyfix Middle East
  • Mar 2008: Lee Metal invests in 30% of PT Indocoke
  • Mar 2008: Lee Metal increases investment in PT Indoferro by US$1.5mil; ownership remains at 30%
  • Jul 2007: Lee Metal raises ownership in PT Indoferro from 20% to 30%

Peer Comparison

Price
EPS
NAV
P/E P/NAV Remarks on profits
Lee Metal 24.5 5.32 21.30 4.61 1.15 Based on FY2009 (diluted)
HG Metal 12 -9.44 14.16 -1.27 0.85 Based on annualised FY2009 plus 1Q10 (basic)
Novo 21.5 3.11 11.54 6.91 1.86 Based on annualised FY2010 from 9M10
Hupsteel 27 1.60 31.90 16.88 0.85 Based on annualised FY2010 from 1H10
Asia Enterprises 32 2.98 24.34 10.74 1.31 Based on FY2009
Simple Average 7.57 1.20

Note: Share price, EPS and NAV are in Singapore cents. Share price as of 23 Apr 2010.

Last Updated ( Friday, 04 June 2010 17:54 )  

Comments  

 
0 #4 2011-09-19 13:34
That depense on STI and world recession. But another thing is, if the steel price falls in the deep recession, the Fabrication segment will make more profit due to good singapore construction market. This will prevent LMG from falling too low.
Quote:
Hi there,

Lee Metal Cash balance has now increased to $100 M. However, the demand for steel and prices have softened. Though the management has a joint venture with UE subsidiary, the project is still a few years away from TOP. That means in the short term, Lee metal net profit may suffer a fall. In a deep recession, will lee metal fall to 6 cts like in year 2008?

Does anyone has an opinion?
 
 
0 #3 2011-07-28 05:48
Hi there,

Lee Metal Cash balance has now increased to $100 M. However, the demand for steel and prices have softened. Though the management has a joint venture with UE subsidiary, the project is still a few years away from TOP. That means in the short term, Lee metal net profit may suffer a fall. In a deep recession, will lee metal fall to 6 cts like in year 2008?

Does anyone has an opinion?
 
 
0 #2 admin 2010-08-10 15:08
[Aug 2010] Lee Metal announced a strong set of profits for 2010Q2. Even though Q2 revenue declined 33% year-on-year, and 23% quarter-on-quarter, net profits remained relatively steady at S$6.2mil. An interim dividend of 0.5c per share has been declared, adding to to 0.2c distributed for Q1.
 
 
0 #1 admin 2010-06-01 05:59
[Jun 2010]: Lee Metal annouces that its wholly-owned subsidiary, jointly with a subsidiary of United Engineers, has won the tender for an executive condominium site in Sengkang. Lee Metal's share of the venture is 35%.
 
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