Nam Lee Pressed Metal Industries: Dragged down by 4Q, but no change in thesis of being a yield play November 30, 2016 947

PSR Recommendation: BUY Status: Maintained
Target Price: 0.6
  • S$129.4mn FY16 revenue missed our forecast of S$143.3mn by 9.7%
  • S$28.0mn FY16 gross profit missed our forecast of S$32.9mn by 14.9%
  • S$9.1mn FY16 PATMI missed our forecast of S$12.4mn by 26.6%
  • 1.0/1.0 cent final/special dividend declared, 53% payout (FY15: 1.0/1.5 cents, 47% payout)

1

Yoy weaker 4Q FY16 did not come as a surprise, but the extent was worse than expected

In our initiation report (16 September 2016), we stated that we had erred on the side of conservatism to forecast a year-on-year (yoy) weaker 4Q FY16. Our 4Q forecast was for S$45.7mn revenue and S$4.45mn PATMI. However, actual 4Q was S$31.8mn revenue and S$1.17mn PATMI. While we forecasted a 4.1% lower yoy FY16 PATMI, the significantly weaker 4Q results dragged the full year PATMI 29.4% lower yoy. Gross margin in 4Q was defended at 18.9%, thus preserving full year gross margin at 21.6%, which is in line with our forecast of sustainable low-twenties.

Disappointed with lower dividends, in spite of the cash hoard that grew

Nam Lee has a dividend policy based on payout ratio, paying about a third of earnings. This is in contrast to a constant dividend policy which pays a constant payout regardless of volatility in earnings. FY16 dividends are lower due to the lower profit, but payout ratio is actually higher. We highlight that the lower FY16 dividend is purely due to the dividend policy based on payout ratio; and nothing has changed in terms of ability to pay a higher dividend. FY16’s 2.0 cents dividend is equivalent to S$4.8mn cash, which is manageable in the context of the net increase in cash of S$8.3mn in FY16 (and this is even after paying S$6.0mn cash for FY15’s dividends). Evidence of the cash hoard can be inferred from the cash ratio that now stands at 2.3x.

Clean balance sheet and net cash position (cash less total borrowings) of 17.4 cents

Nam Lee carries little debt on its balance sheet, with debt-to-equity ratio of 2.9%. Thus we view Nam Lee’s interest burden as being insensitive to changes in interest rates. The cash position is able to pay off total debt and ability to pay dividends should not be affected. In our initiation report, we opined that any price below the net current asset value (NCAV, total current assets less total liabilities) is irrational. We think a price floor at the new NCAV of 35.8 cents is not without merit.

 

Maintain “Buy” rating with lower target price of S$0.60 (previous: S$0.69)

As described in our initiation report, a significant portion of revenue comes from projects and yoy net profit is expected to be volatile. We continue to view Nam Lee as a yield play with low debt, thus avoiding the vagaries of interest rate movements. FY16’s 2.0 cents dividend represents a yield of 5.1%, based on last close price of 39.0 cents. We forecast FY17F dividend of 3.0 cents (1.0/2.0 cents ordinary/special); the implied forward yield of 7.7% is attractive.

 

Company Valuation

We continue using a blended method of P/E multiple and dividend discount model (DDM) to arrive at our valuation for Nam Lee. We apply a P/E multiple to the FY17F earnings. The use of P/E multiple valuation allows us to benchmark Nam Lee to the peer average. At the same time, we also use the DDM in view of the cash generating ability of the business and its history of paying dividends.

  • FY17F P/E multiple valuation

For peer relative valuation, we use the same set of peers found on Page 8 of our initiation report, and use the same 10% discount to peer average P/E. A slight change to our methodology is we will not be using the rolling next-twelve-months (NTM) earnings, but will be using the FY17F earnings for the rest of the year instead. This is in view of the lumpiness in revenue recognition that is due to project-based contributions as well as timing differences on progress billing.

Based on our FY17F expectation of 4.84 cents earnings per share (EPS), we peg that to 9.8x P/E (10% discount to peer average of 10.9x) and derive a valuation of 47.5 cents.

2

  • DDM valuation

We believe that ability to pay dividends remain unaffected, with a net cash position being maintained going forward. We have assumed 0% terminal growth rate in our DDM and valuation is 72.3 cents.

3

  • Blended valuation of 60.0 cents

Our blended valuation for Nam Lee implies 54% upside from the last closing price of 39.0 cents.

 

Important Information

This report is prepared and/or distributed by Phillip Securities Research Pte Ltd ("Phillip Securities Research"), which is a holder of a financial adviser’s licence under the Financial Advisers Act, Chapter 110 in Singapore.

By receiving or reading this report, you agree to be bound by the terms and limitations set out below. Any failure to comply with these terms and limitations may constitute a violation of law. This report has been provided to you for personal use only and shall not be reproduced, distributed or published by you in whole or in part, for any purpose. If you have received this report by mistake, please delete or destroy it, and notify the sender immediately.

The information and any analysis, forecasts, projections, expectations and opinions (collectively, the “Research”) contained in this report has been obtained from public sources which Phillip Securities Research believes to be reliable. However, Phillip Securities Research does not make any representation or warranty, express or implied that such information or Research is accurate, complete or appropriate or should be relied upon as such. Any such information or Research contained in this report is subject to change, and Phillip Securities Research shall not have any responsibility to maintain or update the information or Research made available or to supply any corrections, updates or releases in connection therewith.

Any opinions, forecasts, assumptions, estimates, valuations and prices contained in this report are as of the date indicated and are subject to change at any time without prior notice. Past performance of any product referred to in this report is not indicative of future results.

This report does not constitute, and should not be used as a substitute for, tax, legal or investment advice. This report should not be relied upon exclusively or as authoritative, without further being subject to the recipient’s own independent verification and exercise of judgment. The fact that this report has been made available constitutes neither a recommendation to enter into a particular transaction, nor a representation that any product described in this report is suitable or appropriate for the recipient. Recipients should be aware that many of the products, which may be described in this report involve significant risks and may not be suitable for all investors, and that any decision to enter into transactions involving such products should not be made, unless all such risks are understood and an independent determination has been made that such transactions would be appropriate. Any discussion of the risks contained herein with respect to any product should not be considered to be a disclosure of all risks or a complete discussion of such risks.

Nothing in this report shall be construed to be an offer or solicitation for the purchase or sale of any product. Any decision to purchase any product mentioned in this report should take into account existing public information, including any registered prospectus in respect of such product.

Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may provide an array of financial services to a large number of corporations in Singapore and worldwide, including but not limited to commercial / investment banking activities (including sponsorship, financial advisory or underwriting activities), brokerage or securities trading activities. Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may have participated in or invested in transactions with the issuer(s) of the securities mentioned in this report, and may have performed services for or solicited business from such issuers. Additionally, Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may have provided advice or investment services to such companies and investments or related investments, as may be mentioned in this report.

Phillip Securities Research or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report may, from time to time maintain a long or short position in securities referred to herein, or in related futures or options, purchase or sell, make a market in, or engage in any other transaction involving such securities, and earn brokerage or other compensation in respect of the foregoing. Investments will be denominated in various currencies including US dollars and Euro and thus will be subject to any fluctuation in exchange rates between US dollars and Euro or foreign currencies and the currency of your own jurisdiction. Such fluctuations may have an adverse effect on the value, price or income return of the investment.

To the extent permitted by law, Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may at any time engage in any of the above activities as set out above or otherwise hold an interest, whether material or not, in respect of companies and investments or related investments, which may be mentioned in this report. Accordingly, information may be available to Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, which is not reflected in this report, and Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may, to the extent permitted by law, have acted upon or used the information prior to or immediately following its publication. Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited its officers, directors, employees or persons involved in the issuance of this report, may have issued other material that is inconsistent with, or reach different conclusions from, the contents of this report.

The information, tools and material presented herein are not directed, intended for distribution to or use by, any person or entity in any jurisdiction or country where such distribution, publication, availability or use would be contrary to the applicable law or regulation or which would subject Phillip Securities Research to any registration or licensing or other requirement, or penalty for contravention of such requirements within such jurisdiction.

This report is intended for general circulation only and does not take into account the specific investment objectives, financial situation or particular needs of any particular person. The products mentioned in this report may not be suitable for all investors and a person receiving or reading this report should seek advice from a professional and financial adviser regarding the legal, business, financial, tax and other aspects including the suitability of such products, taking into account the specific investment objectives, financial situation or particular needs of that person, before making a commitment to invest in any of such products.

This report is not intended for distribution, publication to or use by any person in any jurisdiction outside of Singapore or any other jurisdiction as Phillip Securities Research may determine in its absolute discretion.

IMPORTANT DISCLOSURES FOR INCLUDED RESEARCH ANALYSES OR REPORTS OF FOREIGN RESEARCH HOUSE

Where the report contains research analyses or reports from a foreign research house, please note:

  1. recipients of the analyses or reports are to contact Phillip Securities Research (and not the relevant foreign research house) in Singapore at 250 North Bridge Road, #06-00 Raffles City Tower, Singapore 179101, telephone number +65 6533 6001, in respect of any matters arising from, or in connection with, the analyses or reports; and
  2. to the extent that the analyses or reports are delivered to and intended to be received by any person in Singapore who is not an accredited investor, expert investor or institutional investor, Phillip Securities Research accepts legal responsibility for the contents of the analyses or reports.
Subscribe
Notify of
guest
0 Comments
Inline Feedbacks
View all comments

About the author

Profile photo of Richard Leow

Richard Leow
Research Analyst
Phillip Securities Research Pte Ltd

Richard covers the Transport Sector and Industrial REITs. He graduated with a Master of Science in Applied Finance from the Singapore Management University. He holds the CFTe and FRM certifications and is a CFA charterholder.

He was ranked #2 Top Stock Picker (Asia) for Real Estate Investment Trusts in the 2018 Thomson Reuters Analyst Awards, and ranked #2 Top Stock Picker (Singapore) for Resources & Infrastructure in the 2016 Thomson Reuters Analyst Awards.

Get access to all the latest market news, reports, technical analysis
by signing up for a free account today!