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NSL Ltd a consistent high dividend yielder with low payout

Background

NSL LTD was a 60 year old company which originally have much of its business in steel. That was sold off in 2005 to Tata Steel and restructured as such.

Since then the other part of its business have been traded with little volume for years. In 2008, they managed to change their name to NSL, which sounds more appropriate consider they do not have a steel business any more.

The business segments

The group have 4 main business

  1. Chemicals
  2. Environmental Services
  3. Engineering
  4. Construction

Hardly the most attractive businesses but i can assure you that perhaps only the Chemicals business appeal to you.

Particularly, NSL holds a 22% stake in Bangkok Synthetics (BST), a chemical manufacturer.The Company’s products include Butadiene, Butene-1,MTBE and C4 Raffinates.

These products are major raw materials of such downstream petrochemical industry asthe manufacturing of synthetic rubbers and plastic resins,which are essential parts of our daily life in the form of medical devices, food containers, tires, shoes, auto parts,electric appliances, sports equipment, etc.

Why it matters is because the profits from this associate makes up 80% of its profits.

The environmental services have been consolidated prior to 2009 inside the chemicals division.

The other 3 segments  contribute in total around 30-50% of NSL’s profits.

But the main determinant has to be  BST.

Consistent dividends of above $0.10

Since 2006, after the sale of the steel business, the dividend payout is as such:

  • 2006: $0.29
  • 2007: $0.10
  • 2008: $0.20
  • 2009: $0.20
  • 2010: $0.10
  • 2011: $0.10
  • 2012: $0.10
  • 2013: $0.10

At current share price of $1.44, the yield is about 6.9%.

To pay that amount, NSL would require a cash flow of $37.3 mil

Lower than 100% payout

Since 2006, the payout ratio have been consistently below 100%, meaning a safer payout and room to grow:

  • 2007:  109
  • 2008:  76.7
  • 2009:  66
  • 2010:  57
  • 2011: 102
  • 2012:  46

Net Cash Since 2006

Another appeal is that NSL have always been net cash.

It is currently $124 mil net cash or $0.33 in cash.

That will roughly buffer 3 years of dividends.

However, don’t look at it this way, since cash is required as working capital  for project intensive business in Construction and Engineering.

Inconsistent ROE

While there are a lot to like about this business as a dividend stock, there are a few red flags as well.

For one the ROE have been fluctuating wildly. Normally, you would expect a cash build up to be a drag on ROE but in the case of NSL, their cash holding have been falling.

Inefficient capital deployment

The interesting thing is

  1. Share holders equity stay consistently around 500 mil
  2. We know that payout ratio have always been less than 100%, thus there are reinvestment
  3. Capex and acquisitions have been high. Much higher than the depreciation recorded
  4. Cash have been declining, fixed assets steadily growing

You would expect that the cash holding be building up or that the dividend payout to increase. Those have not happen. Dividends have stayed consistent at 10 cents.

All these seem to point to rather poor execution or destruction of capital.

To this day, BST still is their best bet to pay out a good dividend. The construction business have been very capital intensive,  yet a rather low constitutor these 3 years.

You wonder if it makes sense to sell off some of these business.

Major explosion and factory shutdown at BST

And you have incidents like this that reminds you sometimes its good to diversify their business segment.

Last year in May 2012, there was an explosion at BST BR factory in Thailand killing 12 people and injuring many more. Out of the 2 factory producing the chemicals, the BR factory was badly affected while the one producing SBR was intact.

The factory was ordered by Thailand Prime Minister Yingluck to be investigated and production was halted for 6 months.

It was only recently restarted and only SBR is operational.

This causes a 50% plunge in FY 2012 contribution and with BR not coming online, this will affect NSL’s profits adversely.

For FY2012, much of the cash flow was supported by the construction, engineering and environmental business segment.

Going forward, it is likely that the factory producing BR will take some time more to come online, which means that we will be expecting only 20 mil in income contribution from this associate.

Unless they have income replacement insurance in place, we really hope that  they can scrape through to garner 40 mil in full year profits.

Dividends should not be affected by this since NSL have ample cash.

Joint Venture with Japan’s JSR Corporation

In 2011, Bangkok Synthetic signed a joint venture to set up a factory to produce SSBR required for in demand green tire production.

BST will own 49% of this venture and this factory should come online in June 2013.

This factory have the capacity to produce 50,000 tonnes per year with the aim to produce 100,000 tonnes per year.

The opportunity here is that, with their 2 current factories producing 50,000 and 70,000 tonnes per year respectively generating 40 mil of profit on average, a 49% ownership of this could generate potentially 10 mil to 20 mil more.

This would cushion the impact of the other factory damaged and rendered inactive.

Fluctuating demand and profits

One thing investors should note is while the chemical division has so far delivered the goods, in 2009 their contribution have fallen to 21 mil and it requires a construction division which surprisingly earned 24 mil to bring profit to a respectable level.

All this points to an environment that earnings for all 4 division, unlike Boustead, to be rather volatile.

You will want the payout to be kept low, which is what NSL is doing.

Still having a large cash holding buffers any short term cash flow issues

Summary

NSL, like China Merchant Pacific is very illiquid with 80% owned by 98 Holdings, Tycoon Ong Beng Seng’s controlling vehicle.

It will be interesting to see for Q2 2013 whether BST can do better, but i suspect profitability will be impaired at BST.

I think on one hand the low payout and net cash is good, but the destruction of capital on businesses that are capital intensive and not generating more cash flow is something i struggle to lived with.

I wouldn’t be rushing for this one since i have some other potential targets on the horizon. But will keep watch on how they navigate the next quarter.

Still feels China Merchant Pacific is the better deal here.

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