We talked about steel stockist Asia Enterprise Holdings Q3 2011 results yesterday. This week The Edge profiled HG Metal, a steel stockist that got into a bit of an issue during the last financial crisis. [AEH Q3 Report here>>]
This presents a good case study for steel stockist investors or interested investors to manage their expectations as to whether this is a business they want to be invested in.
Some steel stockist list on the SGX includes Asia Enterprise Holdings, Lee Metal, Sin Ghee Huat, HG Metal, Natsteel.
- When the 2007 financial crisis hits, steel prices collapse from USD$1,200 to USD$500.
- HG Metal, gearing up for great growth have stocked up quite a big of inventory, and it killed them.
- There was internal strife and directors tried to oust other directors.
- Current CEO recently took over the management of the company. He owns companies that include Oriental Castle Sdn Bhd, a foundation steel works specialist with projects around Southeast Asia and China.
- Most of the steel stock price decline took place in Aug and Sep 2008 and stayed depressed for 9 months.
- Essentially their bought inventories, goes into their cost of goods sold, is much freaking higher than their average sale prices.
- Current CEO convinced HG Metal have turned the corner. Sold down inventory very quickly, paid back every single bank and supplier. Every debt was honored and no one took a haircut.
- The CEO allowed his own shares to be diluted when they did a placement
- CEO wants to pooled contacts between Oriental Castle and HG Metal to create customized demand steel products for customers
- As a stockist, the company is capable of supplying some 2,000 different steel products that can meet just about all but the most specialised needs.
- The company intends to stock higher grade products such as high-strength beams and abrasion resistant plates.
- The CEO thinks the major revenue for now is still in the distribution business.
- To improve operations, Deloitte was appointed to conduct a comprehensive internal audit of its processes and systems.
- Associate professor Chiew Sing Ping, division head of structures and mechanics at NTU school of Civil and Environmental Engineering as been asked to advise on technical and quality issues.
- He intends to gear the balance sheet more since current gearing is only 0.3 times.
- Margins have been indicated being tighter during this ongoing eurozone debt crisis.
- CEO is keen to pay dividends but will not commit yet.
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Ivan
Tuesday 8th of November 2011
Hi Drizzt,
I love reading your blog and I thought I might add something.
You might not want to consider sin ghee huat as a steel stockist. They are actually a stainless steel stockist.
One thing I felt is that AEH's website is totally geared towards investors and not at their customers. Any comments on that?
Regards,
Drizzt
Saturday 12th of November 2011
Hi Ivan, i think having a publicity site geared towards investors can read both ways. I think it is really positive but perhaps their outreach to customers is in a different way don't you think?
Regarding sin ghee huat, are you saying we should or should not consider it?
Drizzt
Monday 7th of November 2011
Hi GF, an acquiantance of mine asked about Hupsteel. looks like one with some net cash and free hold assets and a 6-7% yield. have you looked into that?
regards.
GF
Sunday 6th of November 2011
Hi Drizzt,
yeah, totally agree with that. Management track record is very impt, since we are not within the industry and have no experience in predicting trends.
GF
Saturday 5th of November 2011
Just to add: AEH too had to write down a huge portion of their inventory when the downturn came, as they bought at high prices and did not expect the collapse in steel prices.
Major difference is that AEH doesn't employ any leverage. The only debt they have is due mainly to delay in payment for their steel inventory.
The steel stockist industry isn't a profitable one, and to me what is crucial is the inventory turnover time. That is a key factor as to how well these steel stockists will do, as they are essentially like the retailers. No major competitive edge, the products are commodities. Who is more efficient in selling wins. In that aspect AEH is much better as an undervalued play.
Vested.
Drizzt
Sunday 6th of November 2011
unfortunately GF, we are not the expert here to say they should stock or not stock up. We are really at the mercy of the managers here and thus it is important to keep watch of their track record.