In our last update report on the takeaways from the FY16 Annual General Meeting (AGM), we had outlined the capital budgeting and capital structure decisions for Nam Lee Pressed Metal Industries (Nam Lee), as well as revenue recognition outlook for FY17. The most significant change we made in our last report was to our valuation method, where we changed from a blended dividend discount model (DDM) to a discounted free cash flow to equity (FCFE) model.
Revenue was in line with our forecast of $40.3mn. Gross profit margin of 14.9% came below our expectations of high-teens to low-twenties. We believe that a significant portion of 1Q FY17 revenue is attributable to the public infrastructure façade project that we reported on in our last update report; and this project is the cause of the lower than expected gross profit margin. PATMI exceeded our forecast of $3.08mn by 3.4%.
As we have stated in our initiation report, one of the investment risk for Nam Lee is its lumpy revenue recognition. This is due to a significant contribution from project-based demand for Nam Lee’s products. Without an order book, there is no visibility on revenue recognition. Timing issues in revenue recognition results in volatile quarter-on-quarter results. Hence, we do not make any changes to our full year forecast for FY17F.
The cash hoard represents a net cash position (cash less total borrowings) of $0.130/share. Nam Lee carries little debt on its balance sheet, with debt-to-equity ratio of 2.7%. In fact, Nam Lee reports a net interest income instead of a net interest expense. Thus we view Nam Lee’s interest burden as being insensitive to changes in interest rates. The current-asset value (current assets minus total liabilities) of $0.371/share should be a floor to the 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 implied next-twelve-months P/E multiple of 14.4x (Source: Bloomberg) for the benchmark Straits Times Index (STI). The last close price of $0.365 offers an attractive estimated dividend yield of 5.5%, which does not take into consideration the cash hoard that continues to be retained on the balance sheet.