We know the Man of Steel very well – Superman. How about the Companies of Steel? The companies that supply steel for our public works or housing constructions.
One key characteristic we notice for these steel distribution companies is they are usually cyclicals.
Peter Lynch has mentioned in his book – One Up On Wall Street that he will category company in one of the six general categories – slow grower, stalwarts, fast growers, cyclicals, asset plays and turnarounds.
‘Cyclicals’, according to Peter Lynch are the companies whose revenues and profits are in tandem with the state of the economy with their performance being tied to the business cycle.
Let’s take a deeper look into the 3 companies below.
1. HG Metal Manufacturing Ltd (SGX: BTG)
HG Metal Manufacturing Limited is engaged in the metal distribution business and is a steel stockist importing steel and selling to end user later on. The company has started since 1971 as a small retailer of steel product and served more than 1000 diversified customers, who are located predominantly in Singapore, Myanmar, Malaysia and Indonesia.
The Company has two operating segments:
- trading segment, which is engaged in the supplying of steel products and includes the holding of investments in subsidiaries in the business of steel distribution and provision of industrial steel services
- manufacturing segment, which produces construction steel products and provides related engineering services.
HG Metal was listed on Singapore Exchange’s SESDAQ, on 21 March 2002 and was upgraded to the mainboard in May 2004. Over the years, the company has derived more revenue from Myanmar (54%) than from Singapore (41%).
Important Note: The company has incurred losses for the past 5 years except for 2016. For 2016, the company has managed to make a profit mainly due to higher gross profit margin and foreign exchange gain.
One of the most significant impacts that technology in the construction of the industry is the reduced timelines for a project to be completed. The reduced timelines is making a big impact not only on the construction, but it’s also making a big impact in the pre-construction speed of projects. This results in contractors figuring out how to grow their construction business more efficiently.
2. Delong Holdings (SGX:BQO)
Unlike HG Metal and HupSteel which are steel stockists, Delong is principally engaged in the manufacture and sale of hot-rolled steel coil (HRC). It’s main market is China but has ventured into Indonesia with its steel mill ready by June 2019. Delong has disposed its Thailand steel manufacturing facilities in 2016.
Delong holdings operates through the following subsidiaries:
- Asia Paragon International Limited
- Owns Delong Steel and the Dezhong International Financial Leasing company.
- Delong Steel has the biggest production capacity at 2.4million tonnes per annum compared to other plants.
- Dexin Steel Pte Ltd
- An investment holding company and iron ore trading and procurement center.
- Delong Asset Management (Hong Kong) Limited
- Revenue may fall between 2-6% on reduced output from the shut-in of one blast furnace in China’s Xingtai City. This is in line with Xingtai City’s policies on the comprehensive management of air pollution in autumn and winter.
- The company chairman has bid to take the company private by offering voluntary conditional cash offer of S$7 a share. However, the privatization plan was scuppered amid a probe by the Securities Industry Council (SIC) into any potential breach of Singapore’s Take-over Code.
HupSteel is a supplier and stockist of quality industrial hardware for the oil and gas, marine and construction sectors. The company plays an important role of bridging requirements between steel mills and end users and has a track record of more than 70 years.
HupSteel has a diversified based of close to 500 customers regionally. Some of its more well known customers are Keppel, Sembcorp industries, Unocal and Gas Malaysia.
But by luck, we discovered that HupSteel is a “Net-Net” stock.
According to Investopedia, Net-net is a value investing technique developed by Benjamin Graham in which a company is valued based solely on its net current assets. The net-net investing method focuses on current assets, taking cash and cash equivalents at full value, then reducing accounts receivable for doubtful accounts, and reducing inventories to liquidation values. Total liabilities are deducted from the adjusted current assets to get the company’s “net-net” value.
Important Note: The company has losses from 2015 to 2016 and has turned profitable again in 2017.
Putting Everything Together
|Price to Earnings Ratio||N/A||2.09||27.0|
|Price to Book Ratio||0.34||0.52||0.56|
|Last Price (at time of writing)||$0.225||$5.89||$0.76|
HG Metal has been incurring losses over the past 1 years, hence the P/E ratio is N/A. It’s Price to Book ratio is the lowest among the 3 companies and this is justified by its losses over the past few years.
Delong has very low P/E ratio at 1.86 and this is probably due to the company being a S-Chip which calls for more margin of safety for investors due to the different governance structure and lower transparencies requirements in China.
Hupsteel has a eye popping high P/E of 24.2 and this is supported by the zero debt and strong balance sheet.
Financial Strength Analysis
|LT Debt to Equity||0%||11.93%||0%|
|Total Debt to Equity||3.41%||60.53%||0%|
HG Metal has very low gearing of 3.41% and Hupsteel has zero debt, while Delong has a gearing of 60.53%. This is due to Delong’s high capital intensive business of steel manufacturing business compared to steel distribution which has a much lower capital expenditure.
Hupsteel also has very strong Quick Ratio and Current Ratio and all thanks to high net cash position.
|Net Profit Margin||-2.26%||11.9%||5.31%|
Delong has a higher net profit margin of 11.9% due to its ability to manufacture their steel product and sell it to end user.
On the contrary, HG Metal has negative margin of -2.3% while Hupsteel has managed 5.3% for Net Profit Margin due to the nature for distribution business.
Out of the 3 companies discussed, it seems like HupSteel is the favored ‘company of steel’ for the following reasons:
- HG Metal continues to bet on the Myanmar market and it might one day turn out to be a strong turnaround play. However, it is difficult to predict when that might happen and it does not look like they are going to turnaround anytime soon.
- Delong continue to face the uncertainties from the Chinese government in shutting down their blast furnaces during Autumn to Winter period. Being a S-Chip, they have a much bigger job to convince the investors of their trustworthiness. Last but not least, Delong has not never distributed dividends and does not seem to be interested to do that in the near future as well. This is a big stigma for investors to invest in them without knowing if there is any real cash in the company.
- HupSteel possess a strong balance sheet (cash – 31 cent per share and zero debt) and good quick and current ratios. In essence, investors have the luxury to stay invested with HupSteel and collect 2-3% of dividend while waiting for the company to unlock substantial value from its attractive portfolio of freehold properties.
P.S. Let’s not forget when we started the article, we mention these steel companies are cyclical in nature. To buy these companies, we need to know what is the economy cycle we are in. If the economy is doing well, we will be on an upward ride with these stocks and vice versa. Have fun investing!
Looking for other stocks with strong economic moats and compelling financials? Simply click here to download it right now!
Disclaimer: The above article and stocks mentioned above are for information purposes only and does not constitute an offer, a solicitation, a recommendation or investment advice to enter or conclude any transactions.