Nam Lee Pressed Metal Industries - Phillip Securities 2018-05-07: Strong Revenue Growth Eroded By Margin Compression

Nam Lee Pressed Metal Industries - Phillip Securities 2018-05-07: Strong Revenue Growth Eroded By Margin Compression NAM LEE PRESSED METAL INDS LTD SGX: G0I

Nam Lee Pressed Metal Industries - Strong Revenue Growth Eroded By Margin Compression

  • Nam Lee Pressed Metal Industries'1H18 revenue and PATMI met 56% and 46% respectively, of our full year estimate.
  • Aluminium industrial product continues to drive revenue, but PATMI eroded by foreign exchange, derivatives and higher tax rate.
  • Maintain BUY; unchanged target price of $0.56.



The Positives

  • Y-o-y revenue growth momentum continues into 2Q18, resulting in strong revenue growth for 1H18. Revenue growth in 1Q18 and 2Q18 were 27.8% y-o-y and 27.4% y-o-y respectively. We believe this is attributable to the Group’s industrial product of aluminium frames for container refrigeration units. This was guided in previous results commentaries by management.
  • Clean balance sheet with cash hoard. Net cash (cash less total borrowings) of $41.1mn represents 46% of market capitalisation. We continue using the current-asset value (current assets less total liabilities) of 37.7 cents/share to demonstrate the limited downside risk.


The Negatives

  • 1H18 PBT margin negatively impacted by foreign exchange and derivatives. There was a net foreign exchange loss and net fair value adjustment loss in derivative recorded in 1H18. This was in contrast to a net foreign exchange gain and net fair value adjustment gain in derivative in 1H17. As a result, other operating costs was 86.4% higher y-o-y, while other income was 85.7% lower y-o-y.
  • Higher effective tax rate for 1H18. This was due to timing difference for qualified expenses for tax purpose.


Outlook


The outlook is stable. 

  • The key aluminium product continues to drive growth, but the tone of the management commentary is less upbeat compared to the most recent two quarters. We believe this is due to uncertainties in global developments over trade tariffs. Nonetheless, the company expects to remain profitable this year. 
  • We are not so certain for revenue growth and expect it to moderate in 2H18. We currently assume 8.5% y-o-y revenue growth for 2H18. 
  • Catalyst for the stock would be contract wins for the building products business, following the ramp-up in infrastructure projects and collective sales activity.


Maintain BUY; unchanged target price of $0.56

  • Following the strong 1H18 revenue growth and weaker than expected PATMI, we adjust our FY18e revenue assumption higher by 8.1% from previous, and PATMI assumption lower by -6.9% from previous.
  • Our target price represents an implied 11.9 times FY18e forward P/E multiple and 0.97 times FY18e forward P/B multiple. We currently forecast 2.5 cents dividends for FY18e (higher than FY17 2.0 cents) and maintain our view of Nam Lee as a yield-play. 
  • We like the stock for its strong balance sheet and high-yield of 6.8% (based on 2.5 cents dividend over the last close of $0.37).





Richard Leow CFA Phillip Securities | https://www.stocksbnb.com/ 2018-05-07
SGX Stock Analyst Report BUY Maintain BUY 0.560 Same 0.560



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