Lysaght
Galvanized Steel Berhad is a leading manufacturer of galvanised steel
poles in Malaysia. Its main products are poles, masts, decorative poles
and tubular steel structures.
An interesting smallcap stock for the following reasons:
1. Zero debt. Zero credit risk. A conservative company. It has been debt free for more than 10 years.
2. Strong net cash position. Its net cash stood at RM59.6m as of end-March 2017. That's 40.9% of its current market cap (RM145.5m)!
3. Single digit PE ratio at 9.2x (based of the net profit of RM15.751m for the most recent 4 quarters). Ex-cash, it is trading at a PE ratio of only 5.5x!
4. Superb margin.
The company has been enjoying margin expansion. Its FY16 gross margin
and net margin were as high as 40% and 23% respectively. The margins
tell a lot about its bargaining power, the competition among its peers
and its specialty. More likely a price maker than a price taker.
5. Products accepted worldwide.
Its products are manufactured in compliance with recognised
International Standards and are accepted worldwide as they are compliant
with British (BS), European (EN) and American (AASHTO) standards
(source: FY16 annual report). Export to advanced countries like
Singapore, Hong Kong, Autralasia. About 47% of FY16 was generated
locally and another 46% was derived from Singapore.
6. Low capex and cash generative business.
It is in a low capex business. For the past 10 years, the capex was
generally below RM2m a year except for FY12 and FY13 in which it spent a
total of RM17.9m on land, buildings and machinery (including a RM11m
factory on a plot of freehold land in Hicom-Glenmarie ). The capex was
as low as RM67,560 in 2009. Despite paying out about 48% of cumulative
core net profit between 2007 and 2016, its cash has ballooned from
RM8.1m end-2006 to RM61.6m end-2016. It disposed off an investment
property at RM6.4m in 2015.
7. Product range and geographical expansions. Whilst the existing operations are fairly stable and sustainable for the moment, the group is currently looking into diversifying into a new product range to cater for tubular steel structures and export market. These products which carry higher loading are manufactured with heavier steel and more sophisticated know-how. Hence, better margin is expected from these products. In its recent AGM, the Board said the company has allocated RM10m capex for machinery upgrade.
8. Positive industry outlook.
The group's business is largely reliant on supply to projects from the
infrastructure and construction sector. Mega projects being implemented
include MRT 2, LRT 3, East Coast Rail Line, Pan Borneo Highway, West
Coast Expressway, Gemas-JB Double Track and KL-Singapore High Speed
Rail.
To
get a feel for the amount of highway jobs being implemented currently,
the longest existing highway in Malaysia, North-South Expressway is
772km long, while in near to medium term, various highways with a
combined length of more than 2,500km are being implemented
simultaneously. Besides these highways, LYSAGHT is likely to benefit
from above mentioned rail-related projects as well. (Pan Borneo Highway
>2,000km, West Coast Expressway 316km, East Klang Valley Expressway,
and several urban highways which include DASH, SUKE, Duke 3 and Duke 2A)
The negative aspects of this stock:
Low trading liquidity. The
Chew family and related parties are holding about 74% of the shares.
Furthermore, it has a small share base with only 41.58m of shares
issued. It is in the bottom 1% or 2% among Bursa Malaysia listed
companies, in terms of number of shares issued. With a share capital of
RM41.58m and retained earnings at RM85.3mn, a share bonus issue and/ or
share split is overdue.
FY16 dividend yield unattractive.
Its 7sen/share dividend for FY16 (2.0% dividend yield) has nothing to
shout about. The Board said in AGM that the company is conserving cash
for capex to widen its product range. However, for the past 10 years, it
has cumulatively paid out about half of its cumulative core net profit.
Between 2007 and 2016, it has paid out RM55.3m of dividends out of the
cumulative net profit of RM114.5mn. Average payout was at 48.3%. It
declared a special dividend of 50sen/share in 2014.
Board tussle.
With the ex-MD, Mr Liew quit the MD role and ceased to be a board
member, the tussle could a thing of the past. The MD position was taken
over by Mr Chua, an old-timer in Lysaght. He was appointed as the acting
CEO on 1 June 2016 and appointed as the CEO on 1 Jan 2017. Assuming Mr
Chua took 3 to 4 months to settle down, the company under his
stewardship, reported strong YoY growths in top line and bottom line for
4Q16 and 1Q17. If we annualise the net profit for the most recent 6
months, the stock is trading at a PE ratio of only 7.9x, and a mere 4.7x if ex-cash!!
Mr Chua is a loyal staff of Lysaght. He has been with the company for 45 years and works his way up to the top.
Conclusion:
Mr Chua is a loyal staff of Lysaght. He has been with the company for 45 years and works his way up to the top.
Conclusion:
Zero debt, strong net cash, low PE ratio, superb margin, worldwide recognised products, low capex, cash generative business, having growth potential and positive industry outlook.
If we annualise the EPS (based on the most recent 2 quarters) and set a target PE multiple of 10 times, the stock is worth RM4.44. This has yet to factor in its cash per share of RM1.43 per share and its growth potential. If we price in a premium of 2x PE multiple for its strong net cash position and growth potential, then the fair value of stock is RM5.33.
A savvy investor, Mr Teo Kwee Hock surfaced on list of 30 largest shareholders, as the 6th largest shareholder as of 31 March 2017.
http://bursastocktalk.blogspot.com/2017/07/lysaght-almost-too-good-to-be-true.html
