HG METAL MANUFACTURING LTD (SGX:BTG)
HG Metal Manufacturing - Higher Construction Output To Drive Forward Earnings
- HG Metal Manufacturing (SGX:BTG) supplies cut & bend reinforcement steel bars (rebars) (72% of revenue) for the construction industry, and distributes and rents out (28%) > 3,000 steel products for use in a wide range of industries.
- HG Metal Manufacturing's key markets are Singapore (93.3% of sales), Myanmar (4.6%) and Indonesia (1.4%).
Pivot to rebar cut & bend.
- From FY19, HG Metal Manufacturing pivoted from the volatile distribution business to focus on supply of cut & bend rebars to the construction sector to:
- ride on strong public sector demand in Singapore;
- minimize margin risks – price increases for rebars and ready-mix concrete can be passed through to customers via BCA index; and
- minimize receivable risks as bulk of orders are government projects.
- Net profit has turned around from FY19 and improving. HG Metal Manufacturing's FY21 revenue and EBITDA rose 55.2% and 231%, a result of 14.5% higher volume and 35.5% jump in ASP. The low-cost inventory on hand lifted EBITDA margin to 12.1%. Myanmar operations, however, shrank by half since the military coup in Feb 2021, and incurred a loss of S$0.9m.
High barriers to entry
- The high barriers to entry are a sizeable cutting and storage facility and dominant sales volume. HG Metal Manufacturing has a storage capacity of 200,000 ton, and handling capacity of 80,000 ton per month in Singapore and Myanmar. Volume of prefabrication construction work is growing, due to noise and space constraints at construction sites, and these work are performed by building material suppliers for an added margin.
- HG Metal Manufacturing’s processing facility gives it an edge. A high sales volume offers operating leverage through better purchase terms, plant utilization, transport and overhead efficiencies. We estimate HG Metal Manufacturing’s domestic share is about 15%.
Demand growth underpins by contract awards.
- BCA forecasts construction HG Metal Manufacturing's FY22E and FY23E is in the bag, though EBITDA margins are likely to normalize to 8-9%.
Trading at undemanding valuation
- HG Metal Manufacturing is trading at undemanding 0.5x of book value (net cash & equivalent = S$0.093 per share) and FY21 EV/EBITDA of 2.4x.
- The risks are supply shortage with output cuts in Russia, Ukraine and China, and higher inventory costs to cushion supply chain bottleneck.
- See
Peggy Mak
SAC Capital Research
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https://www.saccapital.com.sg/
2022-05-04
SGX Stock
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