Soon Lian - SAC Capital 2021-09-29: Higher Price & Demand For Aluminium


Soon Lian - Higher Price & Demand For Aluminium

  • Founded in 1983, Soon Lian (SGX:5MD) sources and supplies more than 1,300 aluminium alloy products, mainly to the marine and precision engineering industries. It also sells to traders and stockists for alloys used in other industries. Soon Lian cuts the alloys into forms and dimensions according to customers’ specifications. Its operations and warehouses are located in Singapore, Malaysia, China and Taiwan.
  • Aluminium alloy is a chemical composition of pure aluminium and other elements such as zinc to enhance its properties such as strength and corrosion resistance. Soon Lian sources from Austria, Greece, Italy, and smaller quantities from Japan and other countries.
  • The barriers to entry are long-term relationships with key suppliers for access to the products, and an established credit track record. The current supply chain bottleneck has lengthened the lead-time for shipment and raised working capital. Importers need strong balance sheets to stay in the game.
  • Its marine customers manufacture aluminium high-speed vessels and crewboats used for ferry, patrol and defence functions. This is a niche sector that caters mainly to government contracts. After a lull in 2020, orders have picked up.
  • The use of aluminium in consumer electronic devices is growing as it is lightweight, anti-corrosive and have high electrical connectivity. Year to August 2021, the output from Singapore’s precision engineering and electronics sectors have grown by 19.9% and 19.6% y-o-y respectively. COVID-induced remote working and learning is fuelling demand for consumer electronics and internet devices. There is also replacement demand from the automotive industry as countries laid out targets for green vehicles.

Soon Lian's 1H 2021 financial performance

  • Higher ASP and volume shipped (compared to a low base in 1H20) drove Soon Lian's revenue higher by 41.5% y-o-y and EBITDA margin to 14.4%. The higher margin was also due to a S$1.9m provisions for impairment of inventory in 1H20 and a S$0.2m writeback in 1H21, resulting in lower COGS in 1H21. ROIC rose to 13.9% (FY20: 2.5%).
  • As the fulfillment hub for its customers and with longer shipping lead time, inventory (S$21.5m) amounts to 40% of total assets. Average inventory days have improved, but stay high at 220 days. Its operations are therefore highly susceptible to fluctuations in aluminium price. Receivables (S$14.2m) account for another 26.6% of total assets. We believe the cash conversion cycle of 230 days is unlikely to be lowered as delivery lead time gets longer.
  • We expect higher cost of inventory in 2H21 as new shipments are received, and 2H21 margin to moderate. However, net earnings are expected to improve on higher volume.
  • In spite of the working capital needs, Soon Lian has been generating positive operating and free cash flows. It has net debt of S$2.8m and net gearing of 8.5%, at 4% average cost of funds.

Price of aluminium has risen 48.1% year-to-date

  • Price of aluminium has risen 48.1% year-to-date and is held up by
    1. Reduced output in China (Aug -3.2% m-o-m) due to suppressed smelting to reduce pollution and meet green targets, and power shortage. China accounts for 56% of global output;
    2. Military coup in Guinea, world’s second largest producer of bauxite, the raw material for production of aluminium; and
    3. European smelters face with higher costs from carbon credit and energy prices.
  • This lifted Soon Lian's 1H21 ROIC to 13.9% (FY20: 2.5%), which was also aided by S$1.9m inventory impairment in 1H20 and a S$0.2m writeback in 1H21. A relatively long cash conversion cycle, at 230 days (albeit an improvement from 304 days in FY20) have deterred new entrants and incumbents with weak balance sheets.
  • The other Singapore listed aluminium alloy supplier is AEI Corporation (SGX:AWG).

Annualised 1H21 EV/EBITDA of 2.3x and P/B of 0.4x

Peggy Mak SAC Capital Research | https://www.saccapital.com.sg/ 2021-09-29
SGX Stock Analyst Report NOT RATED MAINTAIN NOT RATED 99998 SAME 99998