Friday, 18 April 2014

Union Steel Holdings - Buy Recommendation

Today, I am going to initiate a buy recommendation on Union Steel Holdings Limited. I have recently entered into this company at a price of $0.105 for 9 lots, due to limited free cash. I like to put my money where my mouth is, and leave it for you to decide whether you want to enter this company. The current price is $0.108. In my opinion, Union Steel Holdings is an extremely cheap stock right now at its TTM P/E of 6 and P/B of 0.5055 for its most recent quarter according to Bloomberg.

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?


  1. Nice blog and write up.

    I looked at Union Steel before and I would like to share my thoughts.

    Looking at latest half year results, EPS for 6 months is 0.35 cents per share. This is 0.7 cents annualised. At current price of 10.8 cents, Union Steel is trading at 15 times earnings. Doesn't look so cheap anymore.

    I like to ignore Bloomberg's TTM data when there are more recent half year results available. More reflective of what you are buying into, isn't it?

    Moreover, if you look closely at the earnings composition, a significant portion is due to its rental and amortisation of deferred gain on its sale of properties. If fact, deferred gain is going to be non-recurring as it had been fully wound down. If we strip out those property-related items, core business is barely afloat.

    On the balance sheet side, the amount of interest-bearing debts (unsecured) is worrying for me. Mgmt has to demonstrate good ability to manage capital or have good access to financing as they certainly look like they need to do some serious bit of debt collection in order to satisfy short term outgoings.

    On mgmt. While mgmt appears experienced, the tone of management towards near term business outlook is conservative (if you are optimistic) or unconvincing (if you are more skeptical).

    Quote "...pressures from selling prices...more apparent..." More importantly, there is little talk on how mgmt intends to tackle these issues. I like to downplay management optimism but when management is not confident, I have little reason to be otherwise.

    Just my 2 cents on Union Steel. Thanks.

  2. Hi Henry,

    Thank you very much for your comment.

    There are many questions in your response and I will attempt to address them one at a time. Take note that everyone has different investment style and how I feel might be different from how you feel.

    Firstly, I do not feel that using the latest 6 months EPS as an extrapolation for one year EPS is appropriate. This is because the steel industry is a highly cyclical one and if you compare past 6 months EPS from the various annual reports and announcements, you will notice that the 6 months period for the latest period usually lags yearly EPS by quite a huge margin. Moreover, despite this, EPS (latest 6 months) has increased by 0.04 cents. You should use past yearly EPS as a better gauge of the company's operations, considering the fact that seasonal trends does affect revenue for companies in the steel industry.

    I also do not agree with your views on the revenue segment. I see it as a positive sign that the company is trying to diversify its business and explore additional revenue streams, something that is wise considering that the global steel supply has become increasingly competitive. Moreover, if you look closely, you will notice the company's serious attempts to streamline its operations through various channels, the 5 which are listed in my original post.

    For its balance sheet, a quick current ratio and quick ratio will reveal that the company is reasonably liquid, especially if you consider competitors in the same industry with much higher debts and liabilities. Adding on, the P/B is also extremely low relative to competitors, and objectively speaking, it is really quite a great bargain at its current price.

    Lastly, it would be foolish for the management to say that they are optimistic when there is global pressure on the steel industry and lowered prices. What I see is a reasonably conservative management who is trying to explore alternative income streams, while at the same time handling competition from competitors. Annual reports with over optimistic sentiments usually puts me away. Look at the S-Chips.

    At the end of the day, I still hold a bullish view on this company. Unless new announcements tell me otherwise, I see this company as a great buy at its current price. That is all.