Lee Metal Group

[Clement]

Hi buddies,

Anyone looking at this? was comparing the steel stockists companies when I stumble upon this, look attractive. Here is the "story"

1) 1-off bonanza from Austville EC in 2014
They have a 35% stake in JV with united-engineer, the estimated EPS from this venture alone is expected to be 5.2 cents, almost the whole of 2012 earnings.

2) While global steel market languishes, and its merchandising and trading arm continue to deteriorates with the general markets, its fabrication and manufacturing arm that supply mainly to the construction sector of SIngapore is booming, and is offsetting the poor performance of its trading arm.

3) Its Fabrication and manufacturing arm has a record year in 2012 of 30,064,000 profits

2011, 2010, 2009, 2008, 2007
19m, 22m, 27m, 22m, 4m

Its records appear checkered, and margins ranges from 8% to 11%, but

They are pending JTC approval (by 30 oct)to confirm purchases of 1 Tuas Av8 and 3 Tuas Ave 8, the 2 buildings beside their existing facility to expand their manufacturing arm , this action speaks volume of their outlook of the business. Also 1H turnover for the segment is already 192.6m comparable to 361.6 m for the whole of 2012. Demand is still strong, and growing.

4)HDB will taper off its supply to 15k from 2016 onwards, and the MRT lines will keep the industry busy till 2020.

Land use plan Singapore quote MND plan to add 700,000 housing till 2030 to accommodate 6.9 million, granted it is just a guideline, but the sector does not seem to be going to sharp correction anytime soon.

5) Trading arm is in doldrums, but the lower it is, the less chances for this segment to spring nasty surprises, and this segment is of low margin, so any growth or deterioration will not significantly affect the bottom line.

However, China has talk about consolidating the production of steel mills, (BUt iron ore restocking and import is still at record high for recent years), US housing is showing signs of recovery, Europe is stabilizing.
All these crystal glass gazing might be meaningless, but given steel is a commodity indispensable in urbanization, the better the economic acivities, the higher the demand for steel.

6) Unbroken records of dividends and profitability since listing in 2001. Payout ratio is 30-50%, except in 2005, where payout is only 10%

valuation:
At current prices,
you are paying a premium above NAV
you are paying a forecast PE 6x 2013 and 3-4 times 2014 earnings
Projected Dividend yield of at least 7% in 2013 and 2014

Risks
1) High gearing and expected to continue to increase till to their expansions. Gross gearing is 1.5X of equity due to its high inventory
2) Inventory level is higher than equity (175 million compared to equity of 148 million)

As with the case of HG metals, when crisis hits and heavy inventory writedown + high gearing is a recipe for disaster.

I am comfortable with the risk I am taking, since Steel price is some 30% off the peak, and company is generating FCF for most of the years. Net gearing with its FD included will be about 0.5

If you are interested, you can read about my brief comparison of LEE metals with other steel company at
http://sillyinvestor.wordpress.com/2013/...y-summary/

Or a detailed write up from newbiestock from nextinsight in early 2012

http://www.nextinsight.net/index.php/sto...w-pe-of-4q

I don't think this can be compared to the stockists. Correct me if I'm wrong, but their trading arm seems more involved in the trading of scrap metal. The end customers in this case are the minimills.

If the products on their website is any guide, I dun think its scrap metals. But I agree it cannot be compare to stockists

I am rather concern about store and distribution model of business of stockists. It's trading arm has margin of below 2%, the worst compare to all stockists, so I believe lee metals trading arm is really trading, more of transisting orders than distributing.
(My guess only, might be wrong)
I kinda of change my mind as I go from one company to another. BRC Asia is a better comparison like What NTL pointed out. Will look at that more closely. But the trading arm performance really mirrors that of other stockists

From the business part of their website, they said their main customer were mills. It does bring up interesting possibilities. Mini mills have low fixed costs by comparison and are easier to stop and start. I think that might explain their low trading volumes and therefore low margins due to overheads.

[Clement]

I think this company might be worth further research. Their trading results should not be seen in isolation as low price scrap steel sales to mini-mills leads to low priced steel for it's other businesses. In this way they are both suppliers and customers to the mini mills. Does any of their competition have such a business model?

[NTL]

A quick look at their Fabrication & Manufacturing result. It seems that they are having a better margin compare to BRC.

The rise in steel price should benefit scraps too.

Will need to crunch more figures tomorrow.

[Clement]

I don't think high or low steel prices matter. This is a volume business driven by margins. They will be able to pass the costs on to the customer as long as their competitors cannot match their prices. In this industry, cost structure is important as it enables you to compete on price in the worst case. The risk is in volatile prices that can lead to buying high and selling low due to management misreading the market.

[NTL]

The following statement from BRC Q3 announcement makes me believe that steel price do make a difference. It should affect Lee Metal too.

"Margins were relatively higher in 9M13 and 3Q13 due to lower steel costs as compared to the corresponding period in the previous financial year as the average cost of inventory was lowered by cheaper purchases due to declining steel costs while sales orders were secured at better prices."

[Greenrookie]

I think this company might be worth further research. Their trading results should not be seen in isolation as low price scrap steel sales to mini-mills leads to low priced steel for it's other businesses. In this way they are both suppliers and customers to the mini mills. Does any of their competition have such a business model?

Hi Clement,

From the prospectus, I can only find 2 companies with website info, Nasteel and United Steel.

Nasteel do not have numbers to compare, but it business model is the closest to Lee metals, except that they do have their mill, using recycled steel scrap.

As for United steel, besides lower gearing, it was a rather weak peer.It does trading, and fabrication but not manufacturing, whereas Lee metals does not have a recycling facilities, it mainly sort and compressed the scrap metals.

Trading turnover is small, compared to Lee metals, margin is highly volatile, it is loss making in 2009.

Margin and profits improve in 2013 mainly because of their increased in investment in scald folding business. It might be a turnaround story thou..

As for the steel business, Lee metals is stronger, with FCF almost every year, whereas steel union have FCF only alternating year, and after its loss in 2009, think investor community lost faith, it shares price never really recovered. The doldrum after 2009 really spare no one

[Clement]

The following statement from BRC Q3 announcement makes me believe that steel price do make a difference. It should affect Lee Metal too.

"Margins were relatively higher in 9M13 and 3Q13 due to lower steel costs as compared to the corresponding period in the previous financial year as the average cost of inventory was lowered by cheaper purchases due to declining steel costs while sales orders were secured at better prices."

I would consider those to be volatility related, ie change in prices. In this case, they benefitted from the volatility. I think even margins are a shortcut method to measuring competitiveness, think cost and gross profit per ton are better. Alas, I don't think such measures are provided thus we have to use margins.

[Greenrookie]

The following statement from BRC Q3 announcement makes me believe that steel price do make a difference. It should affect Lee Metal too.

"Margins were relatively higher in 9M13 and 3Q13 due to lower steel costs as compared to the corresponding period in the previous financial year as the average cost of inventory was lowered by cheaper purchases due to declining steel costs while sales orders were secured at better prices."

I would consider those to be volatility related, ie change in prices. In this case, they benefitted from the volatility. I think even margins are a shortcut method to measuring competitiveness, think cost and gross profit per ton are better. Alas, I don't think such measures are provided thus we have to use margins.

I also believe sharp rise or fall are more detrimental to the business than absolute high or low price.Like shipping, such cyclical will survive normal market cycles as long as there is no prolonged fall in prices. I think the best situation is gentle increase in price, and ocassional corrections.

btw, to share a steel news:


Steel price on the downside as oversupply continues in China

http://www.steelguru.com/international_n...27202.html

---------------------------

Wonder when the demand returns to pre2008 levels?

[Clement]

The following statement from BRC Q3 announcement makes me believe that steel price do make a difference. It should affect Lee Metal too.

"Margins were relatively higher in 9M13 and 3Q13 due to lower steel costs as compared to the corresponding period in the previous financial year as the average cost of inventory was lowered by cheaper purchases due to declining steel costs while sales orders were secured at better prices."

I would consider those to be volatility related, ie change in prices. In this case, they benefitted from the volatility. I think even margins are a shortcut method to measuring competitiveness, think cost and gross profit per ton are better. Alas, I don't think such measures are provided thus we have to use margins.

I also believe sharp rise or fall are more detrimental to the business than absolute high or low price.Like shipping, such cyclical will survive normal market cycles as long as there is no prolonged fall in prices. I think the best situation is gentle increase in price, and ocassional corrections.

btw, to share a steel news:


Steel price on the downside as oversupply continues in China

http://www.steelguru.com/international_n...27202.html

---------------------------

Wonder when the demand returns to pre2008 levels?

I don't think it is going to happen any time soon. The steel situation in China is one of the reasons i still prefer arcelormittal. Rising shipping rates lowers the competitiveness of China's steel exports to the west. However, I think Lee Metal is experiencing a nice upsurge of demand for it's products. Will this last long enough for the investments in new capacity to pay off?

[NTL]

Just early October I read that steel prices are going up. Now it going down again?

From steel billet chart, it had been going up since July.