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Lee Metal Group Ltd: Value play - Cash rich, bottoming earnings, possible 30% upside.

A frivolous prologue:

In January, we told you the counter we were heavy-on AVI-TECH, deep value, good margins, cash-rich semi-con Back then, no analyst covered, like wearing a disguise Since then, analysts covered, whopping 55% upside The same first VALUETRONICS analyst in 2014 (twenty-fourteen) He's back on the scene, On it first with his team Back then, earnings decline, thirty cents+ it was hated Hit target, 59 cents a year later, investors elated

It's midnight, I'm yawning but typing this post My thoughts are with you though near US east coast like this Frozen Song, time to go long? Yup. "Let it go" Like this. So hold on. Decline gone? The Lee Metal show.

oh ya, before I forget, might be possible for 30% upside… and did I mention no analyst is covering it at the moment?

"Lee Metal Group Ltd, 30% upside?" by the QuantZombie team

Today, we share another that isn’t covered by any analysts at the moment – Lee Metal Group. It’s got a chance to reach 40 cents, a 30% upside from today’s price of 31 cents.

Lee Metal Group Ltd (593.SI – Yahoo Finance) engages in steel merchandising and fabrication activities in Singapore and Malaysia. It operates through two segments - it's main business is in fabrication & mfg and is winding down merchandising.

Lee Metal is a Singapore construction play that is deep value, and has declining earnings that is in the midst of bottoming out. Earnings and revenue has been dropping as the Singapore construction boom has been declining for the last couple years. In addition, Lee has been phasing out operations in Steel merchandising segments. This lead to more than a 3 year decline in share price, from a high of 43 cents in April 2014 to a recent low of 27 cents.

The Story: Since Lee Metal is not well covered in analyst reports, we think many have ignored how cheap the stock price has become (with technical price support). Revenues and net profits have declined for 3 years straight, however, there are signs of turn around due to the final wind down of merchandising and increased construction spending rates. If so, Lee Metal is absolutely too cheap at this price. It’s a sneaky deep value ninja.

Earnings Bottom: 1) The Steel Merchandising is fully phased out this year, there will be no more decline contribution from this low margin segment. 2) The Fabrication and Manufacturing segment is affected by construction activity in Singapore. The BCA estimates construction spending to finally stop declining 2017 onward. The 2016/2017 yoy projected total construction spending is to increase somewhere between 8% to 30%.

Financials: Good operating cash generation (FY 14, 15, 16 all > 30m). Negligible long term debt. Net cash about 85m (this makes up 57% of a market cap of 147m). Dividend yield at 6.4%, paid every year in the last 10 years. PE at 11x, however, PE ex net cash = 4.7x. While earnings have been declining for the last 3 years, shareholder’s equity has been building up from 160m in 2013 to 185m in 2016. The highest P/NTA was 1.1 in 2012, and the 5 year average P/NTA is 0.9. A reversion to either of these is an upside of 12% to 30%+.

Sentiment: Great! No one seems to care. No obvious coverage by analysts yet. Construction stocks have been put in the penalty box for quite awhile now.

Technicals: Good consolidation bottoming pattern. The volume surge in this consolidation resembles end 2012 before it surged higher. Short term target: Clearing 32 cents will push it to 35 cents. Medium term target: 40 cents.

Valuation: the technical price target of 40 cents can be easily justified. Based on a 2 cent dividend payout (last year), that’s a 5% dividend yield with a cash rich company that has stable-to-slight increasing earnings for the next few years. Note that it's Book Value is also 39 cents. Should they do something note-worthy with the excess cash (read: special dividend or share buy-back or good acquisition), that’s a bonus.

Potential catalysts: 1) earnings actually does stabilize. 2) Lee decides to release it’s excess cash in a special dividend payout.

CONCLUSIONS: The technical and deep valuations easily can justify a short term target of 35 cents and a medium term target of 40 cents on the back of a turnaround in earnings based on increasing 2017 construction activity coupled with a sneakily increasing cash-rich shareholders equity in the last 3 years. That’s about a 30% upside. While you wait for the rest of the market to recognize it’s value, get paid a nice 6.4% dividend.

Stay safe!

From the QuantZombie team.

* Disclaimer: This site has been designed for informational and educational purposes only and does not constitute an offer to sell nor a solicitation of an offer to buy any security which may be referenced upon the site. Please consult your own financial adviser to determine what trade is appropriate for you. See our full disclaimer here.

** The author of this post has a long position in Lee Metal.

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