Friday, January 10, 2014

Lee metals - 1st practice of DCF valuation after reading Pat Dorsey

Well, no rocket science, but here goes. First, if the operating numbers make any sense to go further. Picture1lee   Most importantly, FCF, the lifeblood of DCF calculation is reasonable stable Picture2lee   Only 2 years of negative FCF, which is more than offset by the other years, with the average FCF of the last 8 years to be 15 mio and the peak at 53 mio. To estimate the new year FCF, I use 15 mio, with a growth rate of 2%, 3% and 4%, which will be 18 mio, 19.5 mio, 21.3 mio respectively in 10 years time, conservative enough. The problematic part is the discount rate. Pat Dorsey suggest 10.5% for average firms, and use 14% for AMD, personally, I don't think Lee metals is worse than AMD in terms of operating numbers, so the range should be around 11 to 13. I calculate the numbers that show operation efficiency according to the book, and Lee metals didn't do badly. Picture3lee   If you look at debts, it is decreasing as the merchandising arm business slows, and the need for bank bill falls. Non-current debts also get paid down, this is happening on the backdrop of Lee Metals expanding the capacity of the manufacturing and Fabrication arm for the past 2 years. As for CCC, FATO, TATO, inventory turnover etc, there isn't big red flag. I said this because I compare Lee metals with BRC asia, a competitor, which fare lower than Lee metals in almost every metric, especially the negative FCF, irregular increase of debt, while ROE, ROA are comparable,other metric like TATO, FATO etc lost out significantly, until I think it made no sense to go further. Quite clearly, Lee metals performance is not sub-par.While revenue is decreasing, net profits have been increasing. Until thus far, I think it is still reasonable to go on, although as a cyclical in the industrial sector, the book did mention it is no easy to find companies with Moat. From their prospectus: We are a “Mill-less One-stop Shop” providing a range of Reinforcement Steel Products without the need to make heavy capital investments in steel mills. We have also moved into higher value-added manufacturing of Steel Welded Mesh Products. We have developed a network of suppliers as well as land and marine logistics capabilities. Our ability to procure steel products from and supply SRM to our network of regional steel mills have strengthened our relationship with these mills and enabled us to obtain competitive prices for the purchase of steel products from them.   I however, doubt the cost advantage of such business, as their merchandising arm sales is doing very badly (as with the industry trend), I wonder how much cheaper can they get their supplies as compared to competitors, although for the 7-8 steel companies that I researched on, none seem to have such a model. I also wonder why no one replicate this model if it does bring cost advantage. Had I have numbers of tonnage, I will be able to better ascertain if there is indeed a durable cost advantage, but such numbers are not available. If you look at margin, then Lee metals did not do any significantly better than others. If we are the low end of the business cycle, there perhaps is less risk of worsening conditions going forward, but Lee metals have benefited from the local construction sector, which has been going through a boom for the past few years. So although the merchandising arm is already in doldrums, we do not know when the local construction will turn down. If I read its business correctly, the high demand for steel, which is good for the merchandising arm, will also lead to higher steel prices, which is bad for its manufacturing and fabrication arm, at least in the short term. Also, the margins for the merchandising arm is really low, which range from 1-2%, whereas the manufacturing arm margin range from 6-10%, if we talk about good allocation of capital, it made sense that Lee metals squeeze as much as possible from the manufacturing arm when the going is good.It is hard to gauge, net net, if the merchandising arm improve, the net impact is positive or negative. So, it is unlikely that Lee metals will fire at both cylinders, but it is possible to be hit with downturns at both arms, which will then push it to a loss. As such, any gains is capped, but losses unlimited. However, in the bigger overall industry, Singapore local Construction is expected to continue to be resilient. While HDB might be tapering its supply, the MRT will provide the work. BCA estimate for 2014-2016 2014bca   Just a year ago, BCA is still forceasting 20-28 billion for 2014. I believe the increase is due to the fact that MRT projects are starting. Since BCA start giving projections in 2010, they have been way too conservative except in 2010. The preliminary construction demand since 2010 - 2013  are 25.7b ; 32b ; 28.1b ; 35.8 b Again it seems that we might have hit a peak, although demand is unlikely to fall badly to affect the business of Lee metals. A lower-end construction demand of 31 billion and 29 billion should keep Lee metals business going well. And we are not accounting the profits of Austville. In conclusion, sound company with good track records, and a bountiful 2014 boast by Austville earnings. But risk increase significantly from 2015 onwards, should lets give a discount rate of 12% The share per price should be 31.5c, 35.2c and 39.6c respectively with growth of 2%, 3%, and 4% With a MOS of 20%, the price are 25c, 28c and 31c 31c happen to be the NAV price too. Oops... Overpaid. Lets hope the Austville earnings lead to a special dividend, and I am out of here.


  1. DCF is not always super accurate. you can reverse the DCF with a clearer growth to see if the discount rate at current price is attractive

  2. Hmm.. Interesting... Never think of it that way. Will try tonight

  3. I have been reading your blogs for a while now. Just because you read some new book your investment method changed so drastically? You sound really shallow and easily influenced.

  4. Haha sorry to have disappoint u. Plenty of more interesting blogs, especially aggregate blogs like Singapore bloggers or singapore finance news.

    I have started with the nick silly investor, I never pretend that I already know some successful ways, and have always state that I am always learning.

    If with new knowledge, it exposes my inadequacy, I am not dogmatic in my approach, neither would I let egoism get in the way.

    I also start off with saying its not rocket science, with this book, it didn't change what I have been doing, rather it just increases the steps or checklists of things to do, and gave a definite range of values to consider, beside simplistic ratio like PE and the likes.

    But u are most properly right, I am shallow, and will continue to try to fill it up with knowledge. Thank you for your criticism

  5. I play around with the model again, did what Kyth suggested,

    Without applying MOS, the discount rate for current price and pricing in 3% growth is around 11%. So although I might not have get it cheap, I think I didn't get it expensive either.

    Also, although not comparable, I work the numbers for NamLee Pressed Metals and Sin Ghee Huat, in terms of operation efficiency, I look at av. of ROIC, COIC, ROA, ROE, TATO, FATO, CCC etc, Lee metals got ahead in most counts. SIn Ghee Huat is also fairly valued and but its CCC is quite scary!

  6. Just my inputs on the TA side. I looked at the weekly charts. Bollinger band is narrowing...usually that means an explosive movement is coming soon. Since it's weekly charts, the timeframe of soon is in weeks. I suppose a catalyst is coming to move the price, though I don't know whether it's going to go up or down. For your sake, I hope it's up :)

  7. Thanks LP, I hope it's up too!

    But I tend to be quite suay, so won't be surprise of its down

  8. JK,

    What is the point in saying that you are "silly investor"? First few years still can consider a newbie and at learning stage. But how long have you been investing? More than 5 years? And your returns are pathetically miserable this year when it is still bull territory and your peers all achieved a significantly better result. Even CPF guarantees 3% interest with no risk.

    After so long and much experience in the market with so little success, doesn't it show that you are not really suitable for such methods of investment? Perhaps you should listen to Graham and be a defensive investor buying only the ETF on a regular basis?

    I hope you give what I say a careful thought and don't try to think of any "smart" comebacks. My words may sting but the truth hurts and is hardest to be accepted.

  9. Thanks anon,

    I did consider doing bonds and ETFs, and give active stock selection a miss.

    In fact, that option is still on my table.

    I have a plan, which I want to see if it works through a bear and bull market, or a completed market cycle.

    Frankly, I am quite comfortable with what I am doing now, although I would not say I can beat the market over the long term because I have not done it, I am quite sure I can in due time.

    If years of experience is what matters in investing, then all the older brokers or investors are millionaire. It is constant learning that is important, as market is dynamic.

    I am not sure why are u so upset with my investing journey, since its my money I will be losing anyway. Btw, the post about 3.3 % returns, is done when the market correct at the lowest point, it is inconsequential since the market might correct further or rally back. Half of the counters in my portfolio is less than 6 months old, what do u expect? U talk about a bull? Bull starts in 2009 and flatten in 2010-11, with bouts of corrections and rallies from 2011 onwards.

    Investment I made in 2009 and 2010, make at least 50% to 100%. But I didn't talk about them as there Are equal hits and misses during those years, and I want to start a new slate. Net net, I am still much in the black, those were the years I have different framework.

    I am not obsessed with momentarily returns, no one really should. It is quite meaningless. My portfolio is doing much better now, even those that I bought less than 6 months I have yet to collect a single cent of dividend, which I will soon, are showing nice paper profits now. But what's the big deal, tomorrow if market goes into a correction, my port will go down too. If it goes further, I have a plan to accumulate. I can wait out for 2-3 years at least collecting dividends as my research have me confidence the dividends will be there for the next2-3 years at least.

    There is plenty I can brag about, how about buying and selling CES within 3 months and getting a 50% profits? How about exiting Hph with 1 round of payout and profits and getting in at a much lower price again? All these in 2013.

    But I also sell out anchun at 35% loss, a mistake since 2010. One which I cut since it doesn't fit my investment anymore.

    Now, u tell me if CPF or bonds can give me that? But in a bear market, bonds will do better, is the whole investment over a period of time that matters, not snapshot return. Don't insult graham if u yourself know so little. What? 5 years is a big deal in investing? How long have u been investing? My guess is you start in the 2009 years and think u are genius.

    Even victor did offer me a alternative when he critise. And I know his record somewhat, what rights have u to keep babbling when u did not share your own method but hide behind graham.

    Sorry, the gloves are off, I have retreat and give u face. It's u who do not want it. Even if u are Peter lim in anonymous, I still have this to say, your comments and advices just show how little you know, not the other round.

  10. Wow I like ur blog! I wonder how I will go there...

  11. thanks, but what do u mean by "how to get there"

    Yeh , happy reader happy blogger

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