A one-stop specialist offering complete service in the designing, manufacturing and supplying of metal products and solutions, Nam Lee Pressed Metal Industries (Nam Lee) is one of Singapore’s leading providers of fabricated metal products and cutting-edge metal solutions.

Since our previous coverage on Nam Lee in April 2016, the group’s shares have advanced around $0.10, or approximately 34 percent, to $0.375 as at 16 August 2018. During these two years, Nam Lee’s shareholders were also rewarded with a total dividend payout of $0.04. The capital gain and dividend income translates into a total gain of almost 50 percent.

However, Nam Lee’s shares have shown a lack of upward momentum in the past year. We take a closer look to find out if the group could push itself higher in the coming years.

Financial Performance

Although Nam Lee’s business is far from exciting, it is certainly a profitable one.

Nam Lee - Pic 1

Despite some fluctuation over the years, revenue and earnings are relatively stable with a slight upward trend. For potential shareholders, however, that may not mean much unless the company pays out dividends.

In fact, Nam Lee has a solid track record of dishing out dividends. In FY17, the group declared a total dividend per share of $0.02, which includes a special dividend of $0.01, translating to a 2.7 percent yield based on the current share price of $0.375.

In terms of financial stability, Nam Lee’s large cash hoard continues to increase. As at 9M18, the group’s cash and equivalents stood at $47.3 million. Meanwhile, total debt amounted to just $2.2 million, placing it in a net cash position of $45.2 million, making up more than half of its market capitalisation.

Concentration Risk

Nam Lee - Pic 2

Nam Lee’s high customer concentration is definitely a cause for concern. For FY17, the group disclosed that revenue from two major customers amounted to $79 million arising from sales by the aluminium segment and $5 million arising from sales by the mild steel segment. The two major customers accounted for 59 percent of FY17 revenue.

Another ongoing concern is the local property market, which has recently been impacted by a new round of cooling measures announced in July 2018. That said, following the en bloc fever in 2017 and early 2018, the impact on Nam Lee from the property sector would likely to be in the medium and long-term as property developers now have sizable land banks.

Almost Net-net

A net-net company is one that has a market capitalisation that is less than its net current asset value. In theory, net-net stocks are even greater than the Great Singapore Sale as investors get to buy in at discount on the company’s current assets, while fixed assets such as properties come along as a freebie.

Based on Nam Lee’s 9M18 results, the group has a net current asset value $89.3 million, while its market capitalisation stands at $91 million almost falling under the category of net-net stocks.

While many of such stocks are often businesses that are in trouble or are about to sail into dire straits, Nam Lee has been rather smooth-sailing in the past few years.

Potential Privatisation Candidate

Currently, Nam Lee has a free float of 35.4 percent, with a majority of 58.8 percent owned by the Yong brothers.

The group renewed its latest share buyback mandate on 26 January 2018, but has yet to buy back any shares since then. However, the share buyback mandate, which allows the group to purchase up to 10 percent of its own shares, could potentially boost the Yong brothers’ total shareholdings to 65.4 percent.

Stock markets provide businesses a venue for raising capital as well as a market for investors to trade their shares in those companies. For a company like Nam Lee, we believe that its cash hoard is more than sufficient to fund its business operations for the foreseeable future. At current valuations, there is hardly any incentive for Nam Lee to maintain its listing status and going private could allow its owners to save on the ongoing listing expenses.

Peer Comparison

Nam Lee - Pic 3

Meanwhile, Nam Lee’s valuations are far more attractive than that of Compact Metal Industries, the closest listed competitor following the delisting of Lee Metal Group (Lee Metal) earlier this year. Accordingly, Nam Lee is valued at 8.7 times to earnings and 0.7 times to book value. On the hand, Compact Metal Industries is trading at 28.6 times to earnings and 1.1 times to book value, all while not distributing any dividends.

Lee Metal was taken private by BRC Asia for $0.42 per share, translating to a trailing 12 months price-to-earnings (TTM P/E) of around 14 times and a price-to-book of 1.1 times.

Although we cannot predict the chances of Nam Lee being taken private, it would be a rather safe bet while waiting for such an opportunity.

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