Background of Lee Metal Group
Lee Metal Group Ltd is engaged in steel merchandising, fabrication, and metal recycling activities primarily in Singapore, the ASEAN countries, and Australia. The company manufactures and fabricates reinforcing mesh and other manufactured mesh; processes fabricated reinforcing bars; and trades steel and metal materials and/or products.The company is also involved in the property development, construction, and management activities.
Reason why I decided to look into this stock
As some of you might have already known, I am very interested in high dividend yielding stocks. Lee Metal gives out $0.035 dividend annually which translates to 10.94% dividend yield. Very impressive dividend for a company that has so little market cap in such a big industry.
In terms of share price, it’s also making a downtrend, meaning that it’s cheaper for me to purchase if I do purchase it. However, it has come down to an interesting level (0.31) and what’s left to see is if the support or resistance is stronger. Will the 7-month downtrend be stronger than the 6-year uptrend, that has only been tested once back in 2012.
A bird-eye view for those who are interested in other details that I fail to mention.
Revenue & Income
To be honest, I am pretty mixed about this company due to the financials that I see. We are seeing decreasing revenue since 2010 and is likely to continue decreasing going forward. The decrease in revenue however is offset by the increase in net profit margin. I immediately think about the sustainability of this model – Counter decreasing revenue by increasing net profit margin. This method is definitely working, however, how long can this last? There will definitely come a point of time when competitors, especially the larger ones. They can eliminate the company by selling their products cheaper as advancement in technology help decrease cost.
Looking at the Total Assets of Lee Metal, I noticed that from 2013, it has been increasing its Fixed Assets from 38k(’12) -> 57k(’13) -> 69k(’14 Sep). The increase from 57k to 69k came from Investment in Associate.
What I do not like when looking at this balance sheet is the Total Liabilities. Total Liabilities has consistently been almost stagnant with no significant sign of it being reduced in the near future. Most of the debt is not even locked in long-term debt. With existing interest rate environment, I really can’t see how Lee Metal is going to keep up with the interest rates. Debt of this level also means that the company is heavily leveraged. This is something I tend to not like because this is a big risk factor. Although Lee Metal has increasing Retained Earnings, is it a good enough reason to overlook the high debt levels?
Return on Equity
RoE for Lee Metal is very interesting because it’s 25%! Rising year after year, it’s definitely a good sign.
The above chart shows the two factors that affect RoE. Whether or not the RoE is sustainable is determinant on these two. Looking at Total Equity, it has been rising steadily while EBITDA is also set to rise. What I worry is if EBITDA is able to keep up with the pace. EBITDA is able to keep up with such levels is due to increasing net profit margin as mentioned above.
My purpose of buying this stock is for its dividend yield. One of the factor that I deem important in a dividend-giving counter is the stability of cash flow of the company. Looking at Lee Metal’s cash flow, cash inflow (Operations), is very low, and continue to see decrease. A company that cannot produce stable or increasing cash inflow, yet chooses to increase dividend year after year, is not a viable business in my opinion. If operations cannot provide the cash, is the cash dividend coming from debt? It’s never going to be sustainable if that’s the case.
Debt ratio of Lee Metal remains at very high levels and I am not comfortable with it. There’s just too many complications that can arise when debt levels are high.
The business is ‘slowing down’ more and more in terms of Avg Days Inventory. This subjects the company to risks such as massive decrease in steel prices, etc. What happens when it cannot sell away its inventory? Implications would be price cuts, losses, smaller profit margins, etc. Or, could they be stocking up for a project?
We are seeing a company that is increasing dividend year after year.
This is a great sign and this is something I like a lot personally. However, I would be questioning myself if this company has what it takes to give out dividend of this amount, and increasingly. It’s great, but is it sustainable?
A few questions I ask myself:
- Why are they giving out more and more dividends?
- Why wasn’t the money used to repay debt?
- Why money isn’t re-invested in the business for further growth?
- Are the major shareholders cashing out the business?
- Will it last?
Despite the high dividend yield, I remain hesitant about investing in Lee Metal simply because there’s too many questions going through my head which I cannot understand. If I do decide to enter, I would demand a greater margin of safety than simply 10-20% discount. Perhaps looking at $0.20-$0.25 range before considering it again. Lee Metal’s current NAV is $0.36.
Additional reads on Lee Metal
Supplier to SMRT (Circle & Downtown Line) – http://nextinsight.net/index.php/story-archive-mainmenu-60/916-2012/4841-lee-metal-q12-dividend-yield-low-pe-of-4q