Friday, 18 April 2014
Union Steel Holdings - Buy Recommendation
Union Steel Holdings is engaged in the business of recycling of ferrous and non-ferrous scrap metal, trading of steel products, and non-ferrous metal products, rental of sheet piles, steel plates and beams, leasing of industrial properties as well as provision of scaffolding services and related consultancy services, supply of scaffolding materials and skilled workers and buyback of used scaffolding materials (Union Steel Holdings Annual Report, 2013).
So as not to bore you with the details, the current Net Asset Value (Total Assets - Total Liabilities) per share is around $0.2. This represents a close to 100% growth potential for this stock. Most stocks tend to reach their NAV and most even overshoot their NAV over time. However, investors might be worried about this stock because of increasing competition in the trading of metal and lowered prices. However, with the recent enhancements of various business segments like recycling business, the company is getting increasingly diversified and offers a certain safety of margin. However, inventories constitute a large proportion of the group's current assets so there might be a certain discount to its NAV.
Digging deeper, we can see that the group's core operations (Trading & Recycling) are unable to cover the expenses comfortably from the Income Statement (read Notes to Financial Statement Section 6). Yet, rental income continues to be strong and I do not think that there will be any downward adjustments in the near to medium term future, which should constitute a relatively stable income for 2014.
The most crucial factor that led me to make this investment decision was my faith in the management. Mr Ang Yu Seng has decades of experience and he has led the group out of the Financial Tsunami in 2008, suffering a loss in only one year. Despite business being slow (shown by decrease in revenue from 2010 to 2012), I have faith that he will push the company to greater heights, shown by the recent increase in revenue and profits for the FY 2013.
As the global economy continues to gain traction, I have faith that the steel industry will pick up once again. This company has been punished by the market which leads to its current low and cheap price. From a valuation point, there is much upside to this investment and from qualititative analysis done on this company, the growth potential remains. Now the question is, are you game for it?