• 1H17 revenue met 50% of our full year forecast
• 1H17 gross revenue met 43% of our full year forecast
• 1H17 PATMI met 53% of our full year forecast

PATMI is ahead, keeping our forecast intact

While 1H17 PATMI is ahead at 53% of our full year forecast, gross profit is lagging. Lower gross margin was due to a combination of two factors: change in product mix and material cost. Higher material cost is not a major concern at this time, as Nam Lee uses derivative instrument to hedge material cost. The effect of higher material cost offset the other income line through a gain in derivative. Consequently, the offsetting effect has kept 1H17 net profit margin relatively stable at 8.1% from 8.6% a year ago.

Trade receivables were collected, halving the account

There was also an improvement in trade receivables collection this quarter. Trade receivables halved to $22.5 million from $44.4 million a quarter ago, substantially contributing to the $7.0 million increase in cash balance to $41.8 million. For context, average trade receivables over the last three FYs was $34.2 million and average cash balance was $40.0 million.

Clean balance sheet with cash hoard

Net cash position (cash less total borrowings) of $38.47 million is 15.9 cents/share (~44% of market capitalisation). Nam Lee carries little debt on its balance sheet, with debt-to-equity ratio of 2.6% and continues to earn a net interest income. The current-asset value (current assets minus total liabilities) of 35.8 cents/share should be a floor to price downside.

Maintain “Buy” rating with unchanged DCF-derived target price of $0.52

Our target price gives an implied forward P/E multiple of 12.4x over FY17F earnings, versus the Straits Times Index forward P/E multiple of 14.8x (Source: Bloomberg). The last close price of $0.36 offers an attractive estimated dividend yield of 5.6%, which does not take into consideration the cash hoard that continues to be retained on the balance sheet.