Hupsteel Limited - CIMB Research 2017-06-07: A Local Steel Stockist With Sizeable Hidden Assets

HUPSTEEL LTD BMH.SI

Hupsteel Limited - A Local Steel Stockist With Sizeable Hidden Assets

Hupsteel is a local steel stockist serving the marine, O&G and construction sectors.
It is a “net-net” stock (current share price below net current asset value), with sizeable fixed assets and long-term financial investments.
Group net profit returned to positive territory of S$0.5m in 2QFY6/17.

It trades at 0.54x trailing P/BV or 0.42x RNAV if investment properties were revalued at the fair value disclosed in its FY16 annual report.
Group recently bought back its shares, with the highest transacted price at S$0.715.

Hupsteel plays a bridging role between steel mills and end-users, as a steel stockist in Singapore with a track record of more than 70 years in supplying industrial hardware to the marine, oil & gas (O&G), construction and other industries.
The group has a diversified base of close to 500 customers regionally. Some of its well-known customers include Keppel, Sembcorp Industries, Unocal and Gas Malaysia.

Favoured by Ben Graham (widely regarded as the “father” of value investing), “net-net” investing involves buying stocks below net current asset value (NCAV, or current assets less total liabilities) so that even if the business is liquidated, investors will get the business’s fixed assets and long-term investments for free.
At end-3QFY17, Hupsteel’s current assets comprised S$55m cash, S$13m receivables and S$25m inventory, against total liabilities of merely S$4m, leading to NCAV of S$90m vs. market cap of S$88m.

At end-3QFY17, Hupsteel had investment property of S$34m (at historical cost), PPE of S$21m (historical cost) and available-for-sale financial assets of S$21m invested in US$- and S$-denominated debts and equities (marked to market).
According to its FY16 annual report, estimated fair value of the group’s investment properties (all freehold) was c.S$80m, much higher than their stated book value of S$34m based on historical cost.

After six straight quarters of reported net losses, Hupsteel returned to slight positive net profit of S$0.5m in 2QFY17, aided by a leaner cost structure and stabilised average selling prices.
Its significant net losses in FY15 (-S$8m) and FY16 (-S$19m) were largely due to the provisions recognised for inventory balances and receivables. After the provisions, these assets are now reflected at realistic values, according to management.

Hupsteel currently trades at 0.54x trailing P/BV (0.8 s.d. below its historical average P/BV of 0.62x) and 0.42x RNAV if its investment properties were revalued at the fair value disclosed in its FY16 annual report.
Its net cash and available-for-sale financial assets, totalling S$76m as at end-3QFY17, formed 86% of the group’s market cap.

Hupsteel has a history of paying consistent dividends. It paid total DPS of 5 Scts p.a. in the profitable years of FY10-14. In FY15-16, when reported net profit sank into the red, DPS was cut to 0.5 Sct for FY15 and 1 Sct for FY16.
Recent share buy-backs Hupsteel bought back 741.6k shares (0.6% of total issued shares) from the market over the last 12 months, with the latest purchase on 29 May 2017 at S$0.71-0.715 per share.
The group is currently managed by the second and the third generations of the founding Lim family, which collectively controls c.54% of group shares currently.

NOT RATED
Target Price: N/A

Roy CHEN CFA CIMB Research | William TNG CFA CIMB Research | http://research.itradecimb.com/ 2017-06-07

CIMB Research SGX Stock Analyst Report NOT RATED Maintain NOT RATED 99998 Same 99998