Nam Lee Pressed Metal Industries Ltd: Analysis

Today, we will be looking at Nam Lee Pressed Metal Industries Ltd (SGX: G0I), a company listed in Singapore. Do note that all numbers are in the charts and tables are in (‘000 SGD)*

Brief History

Nam Lee Pressed Metal Industries Limited was incorporated on 10 March 1975 by the Yong family, which has been in the metal fabrication business since the 1950s. The family business was started by their father, the late Mr Yong Kwong Fae, who founded Chop Nam Lee, a sole proprietorship, to fabricate galvanised household products such as buckets and bath tubs.

Business Segments

Nam Lee Pressed Metal Industries Ltd’s business segments consists of Aluminium, Stainless Steel and Mild Steel, which can be further broken down as shown below:

Aluminium Mild Steel Stainless Steel
Shipping Containers/Building Products Building Products Building Products

We will be focusing mainly on the Aluminium and Mild Steel segment since the Stainless Steel Segment forms less than 1% of their revenue/profit.

For the Mild Steel segment, you can see that revenue and profit has been going down in the last 5 years. In fact, it recorded a loss of $2,058,000 last year. This is due to the softening construction landscape in Singapore coupled with property cooling measures implemented by the government. (In fact, you can see many SGX-listed construction companies suffering from the same issue)

As for their Aluminium segment, revenue and profit has been holding up well because it not only deals with building products but shipping containers as well. One of its main customers is United Technologies (NYSE: UTX) where Nam Lee supplies aluminium frames for their container refrigeration units, according to a Phillips Securities report. The demand for these container refrigeration units seem to be doing well according to their latest financial report. This might explain why their aluminium segment has been going strong despite the weakening building products business.

Overall Income Statement Analysis

Year201320142015201620172018
Revenue $ 170,798  $ 141,452  $ 164,042  $ 129,398  $ 141,939  $ 156,842
Gross Profit $   25,834  $   23,072  $   35,574  $   27,969  $   27,795  $   29,296
Net Profit $      9,028  $      7,150  $   12,874 $   9,345  $   10,116  $   12,023
Gross Profit Margin15.1%16.3%21.7%21.6%19.6%18.7%
Net Profit Margin5.3%5.1%7.8%7.2%7.1%7.7%

On a whole, Nam Lee Pressed Metal Industries Ltd’s revenue has been relatively stable with net profit increasing from the year 2013 to 2018. Its profit margin has also increased since 2015 (After renewing the contract with its major customer at better pricing according to Phillip Securities – I couldn’t find the original source of information) and has remain quite consistent, which is a good sign of its ability to stay profitable.

Strong Balance Sheet and Net Cash Company

Nam Lee Pressed Metal Industries Ltd has little to no borrowings, and its net cash less borrowings has been growing steadily over the years. In fact, it is holding net cash of $0.16 per share, which represents 43.8% of their market cap.

You might be asking: Why are they hoarding so much cash?

According to a Philip Securities Report dated 6 Feb 2017, the management explained during the FY2016 AGM that their major customer (likely to be United Technologies) requires Nam Lee Pressed Metal Industries Ltd to have a strong balance sheet as a condition to contracting them.

Dividend Payout History

Year20142015201620172018
Dividend Payout (Per share)$0.015 $0.025 $0.010 $0.010 $0.025

Nam Lee Pressed Metal Industries Ltd has been consistently paying out dividend in the last 5 years based on roughly one third (or slightly more) of their earnings. If we take their latest dividend of $0.025, the yield would be 6.8% based on current share price of $0.365. This is a respectable yield which beats the yield of even several REITs and blue chips, which begs the following question:

Is Nam Lee able to sustain its latest dividend payout of $0.025?

Net Cash Generated from Operating Activities $24,305 $11,481 $21,952 $7,383 $14,427
Less Capex $9,728 $11,157 $6,928 $4,396 $7,294
Free Cash Flow $14,577  $324  $15,024  $2,987 $7,133

As you can see above, their free cash flow fluctuates a lot. Hence I take the average FCF which is $8,009. Their latest dividend payout of $0.25 per share translates to $6063.60. Based on last 5 years numbers alone, they should be able to sustain a dividend pay out of $0.25 per share. However, I think it is more reasonable to expect them to sustain a dividend payout of $0.15 per share which would be 45% of their average FCF, and 40% of their average net profit in the last 5 years.

So in short, I think the answer is NO, Nam Lee Pressed Metal Industries Ltd would most likely be unable to sustain a dividend of $0.025 in the future.

Valuation

I will be using two different valuation methods to calculate the intrinsic value of Nam Lee Pressed Metal Industries Ltd.

Discounted Cash Flow Method:

Using a one-stage model with terminal growth rate of 0% and WACC of 10%, I derived an intrinsic value of $0.42. This is a pretty conservative estimate, given that I used a growth rate of 0% and used a higher WACC than its actual WACC. In fact, using the CAPM model, I derived a WACC of only 4.39% for the company due to how little debt (and hence lower cost of debt) it has.

If I were to use Gordon’s equity method, WACC will be 15.8%. However, CAPM is generally preferred over Gordon’s method as it does not takes into account systematic risk (Beta).

I did not apply any margin of safety for this intrinsic value since I have already theoretically applied a ‘margin of safety’ for its WACC. The intrinsic value of $0.42 means that Nam Lee Pressed Metal Industries Ltd is trading at 15% discount based on its share price of $0.365.

Dividend Discount Model:

Using a one-stage model again, with 0% terminal growth rate; cost of equity of 2.6% (Using CAPM Model) and dividend of $0.015 – we retrieved a intrinsic value of $0.58. Using a 30% margin of safety due to the low cost of equity, we get a value of $0.384, representing a 5.2% upside from its current share price.

Is their recent drop in revenue and profit a cause of concern?

Nam Lee Pressed Metal Industries Ltd’s recent HY 2019 results reported a 23% decline in revenue and a 25.5% drop in profit, mainly due to the aluminium segment. It is hard to evaluate this since Nam Lee’s earnings are lumpy in nature. However I do believe that their earnings should improve going forward with the property/construction industry showing signs of recovery, and with strong outlook from its major customer United Technologies.

Other Reasons for Investment and Risks

The three Yong brothers collectively own 58.82% of Nam Lee Pressed Metal Industries Ltd, with each owning less than 20% of the company. This might present a chance for them to take the company private, given that the company is trading at price to book value of 0.619.

They have been leading the company since 1975 – hence there is no denial to their ability in managing the company. However, this also represents a key personnel risk as the youngest of them is 72 years old while the oldest brother is 81 years old.

Conclusion

Nam Lee Pressed Metal Industries Ltd is a company with a stable financial track record and solid balance sheet, as well as a candidate for privatization. Long-term investors can look to adding this company to diversify their portfolio while enjoying a decent recurring dividend, barring any unforeseen circumstances.

As always, do your own due diligence (DYODD) and this is not a recommendation to buy or sell the stock.

Cheers,

Jack

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