Tuesday, November 18, 2014

Portfolio review 17 Nov


Quite a bit of movements in my portfolio.

Sold SPH and APTT for a profit of 12% and 18% profits respectively.

Both are "victims" of my switching strategy. It might be a bad strategy, see here

The money raised was vested into Sembcorp Industries and the rest kept as cash.

I will just hold out for a while longer.

I will like to increase exposure on my existing counters, in particularly Lee metals.

Lee metals has 2 quarters of poor results, and the price has fallen more than 20% from its peak.

However, I think Lee Metals has a lot going for it.

A lot of people point to the falling revenue and high debt as red flags.

Lee metals has 2 business segment: 1) Fabrication and Manufacturing and 2) Merchandising

The poor demand in steel price and trading has cause Merchandising revenue to plummets.

The expansion of the Manufacturing and Fabrication business seems to be happening at a bad time when weaker steel price offset higher volume, net margin is also affected by higher costs of expansion.

So, Why do I still think it is getting valuable.

1) Track records (read here )

2) Dividends
This year, due to the one-off gain of Austville, 9 months EPS is already 5.99 cents. Assume Q4 EPS is 1 cent, full year EPS would be 7 cents. Lee metals give payout of 30% to 50%, 1 cents would be already be given out , we are then looking at final and special dividend of 1.5 cents to 2.5 cents.

3) Discounting merchandising and trading arm
Theafter, assume Merchandising business is non-existence, it should not add too much to the cost, its warehouse facilities etc are fix costs for its Manufacturing business anyway, no trading of steel, no profits, hardly any reason to believe that this Merchandising will push Lee Metals into loss.

Assume the expansion of capacity did not yield growth in EPS but status quo, just the Manufacturing arm would have yield 4 cents EPS. 2 Cents DPU seem sustainable, and the worst case scenario of 1.5 cents DPU  would also yield a decent 4.5%

4) Outlook
The steel overcapacity has already claim one casualty in China (http://www.hellenicshippingnews.com/china-major-private-steel-company-files-for-bankruptcy-protection/)

I think we are closer to the bottom of steel than we think, how long we stay at the bottom is anyone guess. The important fact is, how much lower can steel price go, since market supply is already doing self-adjustment.

As for demand, the MRT building will continue to provide the demand although competition will be a problem.

2014bca

5) Debts

Most of Lee metals debts are bills payable to banks, which are short term loans for the inventories. Unless there is no demand for the inventories, the bills get paid once the inventories move. The bills payable to banks is directly correlated to inventories, there is no evidence of build up of inventories, in fact, Q3 inventories in lowest YTD despite the expansion of capacity.

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I am also tempted to trade golden agri.

Why do I say Trade?

Golden agri do not have time on that side.

Compare Golden Agri and First Resources, their old profile of their trees is unfavorable. Management has not laid out plans for replanting, and I have never heard of them update their liberia fund, which is supposed to provide the growth in plantations.

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As for the worst performing LMIR, I have already blogged about its earlier Quarter result.(Read here)

I think the Kemang Mall is yield accretive and at worst, status quo.

In the short term, there might be some admin and fiance costs relating to the equity exercise that will affect distribution, but the longer term consumer story at LMIR is still sound.

I will not be adding though, as there are pockets of concerns, particularly with Pluit Village mall

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I might also add ST engineering. I will just wait for a while.

My radar of companies is now bigger so I believed there are plenty of chances to redeploy the cash from sale of APTT.



11 comments:

  1. Hi Sillyinvestor

    Just wondering whether you include dividends in calculating your net profit or loss?

    ReplyDelete
    Replies
    1. Thanks Sillyinvestor.

      I might take a look at Lee Metal since you have made reviews there :) it could be hidden gems in the making.

      Delete
    2. Oh... Do blog about your findings.

      I will love to read it

      Delete
  2. I am expecting sph to inject seletar mall (due to open this month) into sph Reit and may be some special dividend? :)

    ReplyDelete
    Replies
    1. Hi capricon

      The Injection of seletAr mall will be a matter of when and not if.

      As for special one off dividend, I would think the probability is very high.

      There is a CIMB research stating they will only inject it in 4 year time, might be a good idea for the rental revision to kick in 1 round to get maximum valuation before recycling it into reit.

      I would say SPH is a good counter to have.

      Delete
  3. Right now iron ore (raw material to make steel ) is already very oversupply in the market and prices of iron ore has already fallen into 5 yr low.next year expected to have more volume in the market and further depress iron ore prices and steel prices

    ReplyDelete
    Replies
    1. Hi Vincent, u are definitely right about the over supply of ore and steel. I have no idea how much longer or how much worse it will get.

      But things are already pretty bad now and Lee metals is coping well. Moving away from trading to manufacturing provide the big buffer to price weakness of steel. The strong construction demand help too.

      I would rather buy a survivor at a downturn with sound dividend paying policy and wait out the cycle and either collect dividends or capital gain later than go for hot stocks with rosy outlook that can turn as fast as roti Prata. I am more of a bottom up guy and look for companies that can ride through cycles. Just look at how aerospace outlook changes within 6 months?

      The question is, does the company has moat? As shown in their track records and what is the near future outlook?

      Delete
  4. I take a look at Lee Metals today. Just a preliminary glance.

    Despite giving high dividends, i was a bit spooked by its debt level. Revenue seems to have been dropping for a few years but net profit margins is increasing. I hope this is sustainable

    Cash flow from operations is low, yet it is increasing its dividends payout for past 3 years. Hmmm

    I would demand a higher safety margins, maybe 25 cents? alert me when it reaches this price :)

    I have not study your past posts on lee metals in details, will take a look soon to know more the economics and fundamentals of the company.

    ReplyDelete
    Replies
    1. Debt is indeed a problem if they mismanage their inventories or if the customers back out from their orders.

      They have a good track record of inventory management. They are caught in lowering steel price for a while now. If they continue to earn profits, I think that speak volume. Last 2 quarters margin for manufacturing irrc is also stable.

      Cash cycle is worsening the last time I check. I will do it again with the full year results.

      I see a moat.

      My eyes are blind though... Lol

      Delete
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