Nico Steel Holdings (Nico Steel), a SGX Mainboard-listed entity since 2009, specialising in production of ferrous and non-ferrous metal alloys, recently announced its earnings guidance for FY19. It expects to record a significant increase in profits as compared to the previous year. This comes after a set of good profit performance during 1H19 as compared to the same period last year.

financials

Source: Company’s Financial Statements

Management also cited in the announcement that despite the fallouts of the US-China trade disputes since July 2018 and delays in the implementation of the 5-Generation (5G) network system, the expected increase in the profit attributable to shareholders is primarily due to an improvement in the operating results of the Group.

Meanwhile, the complete set of financial results is expected to be released on 30 April 2019.

A Signal For Investors?

 Nico Steel Holdings FY 2015 FY 2016 FY 2017 FY 2018 LTM Ending
28/2/15 29/2/16 28/2/17 28/2/18 31/8/18
Return on Assets (ROA) (%) -1.0% -6.8% -6.1% 0.2% 1.7%
Return on Capital (ROC) (%) -1.1% -7.5% -6.8% 0.3% 1.9%
Return on Equity (ROE) (%) -3.9% -23.3% -17.2% 0.5% 1.5%
Gorss Margin (%) 13.9% 19.0% 19.5% 26.1% 28.4%
Net Profit Margin (%) -2.3% -15.6% -14.1% 0.3% 1.0%
Current Ratio 1.7 1.7 2.7 3.2 3.5

Source: SGX StockFacts, Company’s Financial Statements

Based on the table shown below, we noted that Nico Steel’s return and margin ratios have shown steady improvements after reporting dismal years from FY15 to FY17 where most of the returns were negative, and net profit margins were negative before there were some positive light starting from FY18. Moreover, the liquidity ratios, as measured by the current ratios, suggest that the Company is keeping a high bar when it comes to having the ease of accessibility to liquid assets in the event of a severe deterioration in business conditions.

We also noted that Nico Steel’s debt trends have also gradually improved, resulting in higher interest coverage and lower debt-to-total equity ratios

nicodebt

Source: StockFacts, Company’s financial statements

Valuations for Nico Steel Holdings Don’t Come Cheap

  P/E Dividend Yield (%) P/BV Market Cap (S$’m) Total Revenues (S$’m)
Nico Steel Holdings 47.6 N/A 1.2 29.8 20.7
AA Group Holdings N/A N/A 0.5 32.1 19.5
Accrelist 7.6 N/A 0.4 22.3 160.9
CPH N/A N/A 0.9 8.6 4.8
GRP 24.7 4.07% 0.3 23.8 30.8
Jadason Enterprises N/A N/A 0.4 19.5 54.8

Source: SGXStockFacts

Based on the peer comparisons, in terms of relative valuation multiples, Nico Steel’s price multiples looked relatively high among its competitors. Despite having a core metal alloy business, Nico Steel is also involved in metal slitting services, and is a parts maker serving various industries including the electronics firms. Therefore, it is not a typical pure play steel company, and instead a multi-products and services firm.

That said, Nico Steel continues to be exposed to the various cyclical shifts, and the latest positive profit guidance might not repeat in future years.

Should Investors Necessarily Jump Onto The Bandwagon?

Based on past historical financials, Nico Steel has been demonstrating to investors and shareholders that they are gradually turning around their business based on the improvements in the returns, margins, and gradual declines in their debt ratios.

However, if we were to take a look at their valuation multiples, it does not come cheap especially in this peak economic environment where any significant shocks like a potential non-conclusion of the US-China trade tensions, an unsettled Europe with the continuing “Brexit” stalemates, and the prolonged slowdown in China’s economic growth, could put Nico Steel back into a vulnerable state.

Investors might instead choose to keep the counter in their watchlists, and continue to monitor their financial and operational performance going forward. There is plenty of time to wait, and investors should be mindful to minimise “buying high and selling low” actions in order to ensure that their investments are value accretive in the long run.

Related Article:

SI Research: Following The Big Boys

Get weekly updates from us

Build your wealth. Start now.

Enjoying our content? You might want to subscribe to our weekly newsletter.
Hand-picked content and wealth-building resources for you.

You May Also Like

Editor's Picks