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PR Newswire
08-10-2010, 10:33 PM
The liquidation value of inventory and the gross profit margin are linked to the amount of "value-add" of the products. The value-add may come directly from the processing by the stockist who has manufacturing facility or simply from the risk of carrying the inventory.
Think in terms of a per unit weight basis. The more unprocessed a finished product is the better the liquidation value (lower risk). Comparing between a steel plate and a flange of a certain dimension, the flange requires higher skilled labour, more precise machining, costlier storage, etc. That sort of justifies the higher GPM. However, liquidation of steel stockists does not have to go through the auction-type fire sale. The lowest price one can get is the scrap value (check out Union Steel website). In scrapping, the value-add does not count - only the weight counts. Assuming the worst price, if we were to liquidate Sin Ghee Huat and the other stockists, Sin Ghee Huat inventory would have a greater discount than e.g. HG Metal, against the value that is carried on their books. Of course, other stockists of similar products may buy over the inventory at better prices, but to be absolutely conservative don't count on that.
It's a three-factor problem.
1. Liquidation value
2. Earning
3. Price
Better earning accompanies lower liquidation value, and vice versa. If the price compensates for either one or both, then the stock could make one good investment. We have witnessed one of the most, if not the most, volatile steel price fluctuation in the past few years. Stockists in Singapore generally came out unscathed except that they became more cautious. HG Metal aggressiveness eventually caught up with them but that's more of an exceptional case, I think. As long as the balance sheet is not overly stretched and the company is not thinking of gaining market share, the "oligopoly" business environment can allow for many more good years. The average of the good and bad years should give an indication of the, well, average earnings. If we assume just the average earning forward, I don't think it is important to know where the steel price is going to be. Unless one is anticipating a rise in steel price will result in a better reported profit and then a better sentiment to push up the share price. Alternatively, get those stockists with good payout ratio to receive the regular dividends as investment returns.
Just my thoughts. I might be totally wrong.
Think in terms of a per unit weight basis. The more unprocessed a finished product is the better the liquidation value (lower risk). Comparing between a steel plate and a flange of a certain dimension, the flange requires higher skilled labour, more precise machining, costlier storage, etc. That sort of justifies the higher GPM. However, liquidation of steel stockists does not have to go through the auction-type fire sale. The lowest price one can get is the scrap value (check out Union Steel website). In scrapping, the value-add does not count - only the weight counts. Assuming the worst price, if we were to liquidate Sin Ghee Huat and the other stockists, Sin Ghee Huat inventory would have a greater discount than e.g. HG Metal, against the value that is carried on their books. Of course, other stockists of similar products may buy over the inventory at better prices, but to be absolutely conservative don't count on that.
It's a three-factor problem.
1. Liquidation value
2. Earning
3. Price
Better earning accompanies lower liquidation value, and vice versa. If the price compensates for either one or both, then the stock could make one good investment. We have witnessed one of the most, if not the most, volatile steel price fluctuation in the past few years. Stockists in Singapore generally came out unscathed except that they became more cautious. HG Metal aggressiveness eventually caught up with them but that's more of an exceptional case, I think. As long as the balance sheet is not overly stretched and the company is not thinking of gaining market share, the "oligopoly" business environment can allow for many more good years. The average of the good and bad years should give an indication of the, well, average earnings. If we assume just the average earning forward, I don't think it is important to know where the steel price is going to be. Unless one is anticipating a rise in steel price will result in a better reported profit and then a better sentiment to push up the share price. Alternatively, get those stockists with good payout ratio to receive the regular dividends as investment returns.
Just my thoughts. I might be totally wrong.
