Since
I came to i3 from July 2017, I have so far covered 7 stocks. There are
HENGYUAN. MASTEEL, PETRONM, Inta, Lionind, Annjoo and hiaptek (stopped
covered Hiaptek)
I
had written 2 articles for Masteel, 7 articles for Petronm, 7 articles
for Hengyuan 1 for Annjoo and 2 for Lionind. Petronm's price has reached
RM13 while Masteel price has rallied to RM1.60 (considering bonus issue
the actual price now is RM1.92) and Hengyuan's pirce has touched RM15. Pls refer the links below for my previous Petronm and Hengyuan articles:
http://klse.i3investor.com/blogs/davidtslim/ (Hengyuan part 7, 6, 5)
LEON
FUAT BERHAD (LEONFB) is involved in the business of trading and
processing a wide range of steel products of different shapes,
dimensions and grades to meet the requirements of customers. Their
processing business is synergistic to our trading operations, whereby they provide various value added services in the form of cutting, levelling, shearing, profiling, bending and finishing
as well as production of expanded metal to meet the requirements of our
customers. With the advantage of having in-house processing facilities,
Leonfb is able to meet specific product requirements of our customers,
as well as serve customers in multiple industries, each used for
differing applications. The Group has a large customer base comprising
manufacturers of metal products and components, fabricators of
machinery, equipment and metal structures, companies within the
building, construction and infrastructure industries, and hardware
wholesalers and retailers, from local as well as overseas markets namely
Thailand, Singapore and Vietnam. For FY16, Leon Fuat has more than
3,000 active customers.
Leonfb products consist of the following:
Stainless steel flat
Stainless steel long
Carbon and alloy steel flat
Carbon and alloy steel long
Leonfb’s cutting services (Processing):
CNC Laser Cutting • CNC Waterjet Cutting • CNC Plasma Cutting • Portable Plasma Cutting • CNC Oxy-gas and Plasma Cutting • CNC Oxy-gas Cutting • Oxy-gas Cutting with Optical Tracer • Portable Oxy-gas Cutting • Bandsaw Cutting OTHER SERVICES Levelling • Guillotine Shear • CNC Press Brake (Bending) • CNC Turret Punching • Profiling • Surface Polishing
Fundamental Data
Currently Leonfb is trading at PE Ratio of 3.89 (based on current price of RM0.785) with EPS of 20.18 sen. Its profit has been improving from 2015 to 2017 (3 quarters so far) as shown in the graph below:
Source: http://www.malaysiastock.biz
For Q3’17 result, the revenue is new high at RM177.9 mil with net profit of RM13.7 mil. This profit includes recognition of gain on bargain purchase for RM2.70 million, arising from acquisition of PCP. As a result, so effective operation EPS would be about 3.3 sen (RM11 mil).
Its Return of Equity (ROE) is 20.38% which indicates that it is very effective in generating return (profit) from its total equity. It has paid decent dividend from 1.5 sen to 3 sen in the past 4 years. A summary for Leonfb fundamental and past quarter profit is as below:
- Profit margin (after tax) of 7-8% in recent four quarters is considered a good margin for downstream steel players.
- LeonFB has remained profitable for 4 years since listed in 2013.
- It has shown profit growth YoY (year-on-year) for the past 7 quarters.
- Processing revenue and profit is slightly higher than Trading revenue as shown in the table below:
Source: Q3’17 report
Future Profit Catalysts and Expansion Plan
LeonFB has three expansion strategies in driving future revenue and profit .
First Strategy: New tax-exempted warehouse in the Port Klang Free Zone, completed and commenced operations at the end of 2016. The warehouse currently has a net usable factory storage space of approximately 95,000 sq.ft. Bigger warehouse mean they can buy products for trading in larger quantity (lower price if they buy in large quantity). Warehouse is important for their trading of steel business as they can keep stock of various sizes of steel products and provide timely supply to customers.
In addition, this type of warehouse called bonded warehouse and it is mainly for exporters or tax-exempt businesses to procure directly from the Warehouse without tax.
Such warehouses need to be strictly regulated by the Customs to prevent enterprises to conduct tax evasion. This not only can save costs for a particular customer, but it also has a positive cash flow advantage by saving the time to process of tax rebates (mean no need to wait to tax refund).
One proof of the benefit of new warehouse is we can observe that their profit from trading is nearly double (RM30.7mil vs 16.3 mil YoY) and revenue is also increasing from the table above (segmental information table).
Second Strategy: Renovation and refurbishment of its existing building located directly opposite Wisma Leon Fuat. The new refurbished processing plant has approximately 60,000 sq.ft. of usable factory space, housing both of its new CNC cutting machines that will enhance its efficiency as well as production capacity. With the completion of this plant, it will become one of our key assets to enhance its future profitability. The plant has increased its current production capacity (refer to Annual report of 2015). Of course, the new plant takes time to release capacity and finding new customers.
Third Strategy: Proposed new venture into the steel pipe manufacturing sector, which will be implemented at their new plant located at Persiaran Sultan Alauddin KU 17 (also known as Persiaran Sultan Abdul Samad) within Kawasan Perusahaan Bandar Suleiman, Pelabuhan Klang. As leonfb are procurers of steel coils and other steel products, they plan to diversify into providing end products that are produced by these raw materials. The proposed diversification will help reduce its exposure to market volatility in a particular sector. As many of its regular customers are purchasers of steel pipes, it is an added advantage that leonfb are able to leverage on their existing client network for steel pipe business. An estimated initial outlay (for phase 1) of at least RM70.00 mil will be required for the purpose of this venture as capital expenditure. Leonfb target to commence operations by the middle of 2018, and they foresee this venture to become their third core business segment and one of the significant income-generating sources in future.
Leonfb has relatively high inventory value as per reported in Q3’17 result. The global stainless steel demands has picked up in second half of the 2017 as per table below:
Source: http://www.worldstainless.org
Source: http://www.worldstainless.org
China is largest stainless producer in 2016. China recent steel production cut will make world stainless steel price to be stable.
Based on the global demand forecast and leonfb’s tax-free warehouse and value-added processing capabilty, I would expect Leonfb can increase its coming 12 months revenue and profit. Let see a comparison table of the 2016 vs 2017 quarter profit results for Leonfb as table below:
2016 and 2017 Quarter Profit comparison
|
|
2016 (EPS in sen)
|
2017 (EPS in sen)
|
2017 ( EPS in sen) (stripped off disposal gain)
|
|
Q1 |
0.2
|
2.85
|
2.85
|
|
Q2 |
3.74
|
9.69
|
3
|
|
Q3 |
1.78
|
4.44
|
4.44
|
|
Q4 |
3.2
|
?? (estimated around 4 sen)
|
?? (estimated around 4 sen)
|
|
Total EPS |
8.92
|
20.98
|
14.29
|
At EPS of 14.29 sen, Leonfb (RM0.78) currently is trading at PE ratio of 5.45. Leonfb actually has a dividend policy of 30% from profit (3 sen dividend as per 2015 Annual report), but due to expansion capex requirement, its has reduced it dividend payout to 1.5 sen in FY2016. With decent profit growth (back by strong revenue growth) and steel pipe business venture in mid of 2018, I would expect Leonfb coming FY2018 EPS will be further improved.
Based on the estimated 14.29 sen EPS (by Feb 2018 for FY2017) and future profit growth, LeonFB should worth PE of 7x to 8x which leads to target price of RM1 (PE 7X) and RM1.14 (PE 8X). This target price is for short term target price (about 3-4 months) without considering the future profit contribution from the new steel pipe manufacturing business.
With new steel pipe profit contribution in 2018 (plant expected to complete by mid of 2018), earning in FY2018 can be higher than EPS 14.29 sen. With more infrastructure projects are expected to be launched in 2018, steel trading and processing businesses and steel pipe manufacturing business are expected to continue to have stronger growth than 2017. This future profit is still not factor in profit contribution from the newly acquired PCP company.
I will revise my TP if there is positive contribution from steel pipe business in my future article.
Financial Data
Some of you may have noticed that LeonFB has relatively high borrowings in their balance sheet. But I wish to let you know Leonfb as a steel products trader, they need to buy from upstream manufacturer (normally with cash term) and give credit term to their customers. To reduce cash flow burden, Leonfb uses bank guarantee (BG) or bank acceptance (BA) facility to buy from their suppliers which is treated as borrowings in their account. That why you will notice that Leonfb has relatively low payable amount (26 mil) vs a relatively high receivable amount (172 mil). As long as bad debt ratio is maintain at low level (bad debt impairment of RM0.5 mil only in 2016), cash flow will not be an issue as Leonfb normally granted customers credit periods of between 30 days to 120 days. Let us have a look on the balance sheet of Leonfb which show their total of receivable and inventories are actually much higher than their borrowings as shown in the table below:
Source: Q3’17 report (can check their group borrowing mainly bank acceptance (BA) or (BG)
The high borrowings of leonfb (due to bank accepteance BA or BG) are to get more income from trading business which their trading profit margin is much higher than the bank interest.
Let me have a SWOT analysis on Leonfb as below:
SWOT analysis (S-strengths, W-weaknesses, O-opportunities, and T-threats)
|
Strengths |
Weaknesses |
|
1.New tax-exempted warehouse for trading businesses.
2.The new refurbished processing plant has increased their processing capacity. This allows them to increase the processing revenue and profit.
3. Integration of trading and steel processing as they can provide one-stop solution to customers that need to have some customization on their orders.
4.Proposed new venture into the steel pipe manufacturing which will generate more income in 2018.
5. Large inventory which can provide timely supply of products for its customers.
|
1.High borrowings. However, high borrowings of leonfb (due to bank acceptance BA or BG) are to get more income from trading business.
|
|
Opportunities |
Threats |
|
1.A lot of infrastructure projects running in 2017 and 2018 which provide demands for steel pipe and
2.China production cut in winter season will make stainless steel price stable which is favourable for trading business
3.Leonfb has over 3000 customers
(including oversea) which its can leverage on its existing client base
for its expansion of its processing and trading businesses.
|
1.Higher transportation cost due to higher fuel price in recent two months
2.Skilled labour shortage for its steel processing segment.
|
Summary
1. LeonFB has remained profitable for 4 years and its profit margin is quite stable over the past 4 years (no matter how low or bad the steel market like what happen in 2014)
2. Currently it is trading at PE of 3.87 (due to disposal gain) and its Q4 profit is expected to remain strong in view of new tax-exempted warehouse and increase capacity processing plant.
3. The under construction steel pipe plant that enable leonfb to have new income and revnue in 2018.
4. Large inventory which can provide timely supply of products for its customers and it may has ivnentory gain if stainless steel and carbon steel products prices are on uptrend.
5. Leonfb's processing business is synergistic or integrated to thier trading operations, whereby they provide various value added services in the form of cutting, levelling, shearing, profiling, bending and finishing.
6. Based on the estimated 14.29 sen EPS (by Feb 2018 for FY2017, 14.29sen EPS is stripped off disposal gain) and future profit growth, LeonFB should worth PE of 7x to 8x which leads to target price of RM1 (PE 7X) and RM1.14 (PE 8X). This target price is still not factor in future profit contribution from the under-construction steel pipe manufacturing business and newly acquired PCP subsidiary.
If you interested on my analysis report, please contact me at davidlimtsi3@gmail.com
You can get my latest update on share analysis at Telegram Channel ==> https://t.me/davidshare
Disclaimer:
This writing is based on my own assumptions and estimations. It is strictly for sharing purpose, not a buy or sell call of the company.
http://klse.i3investor.com/blogs/david_masteel/142423.jsp
