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SGX:BTG HG Metal


frommi
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Its a small steel company in Singapore. They recently sold a subsidiary and paid a large special dividend, so i assume that they are shareholder friendly. They also bought back some stock in 2015 at historical lows and i think that its possible they do it again next year.

They won a litigation in court where they should get ~1.75$ million. Most of the losses last year are the writeoffs of the subsidiary they sold, so i can imagine/hope that this was a loss making subsidiary and they get back to profitability next year. Operating cashflow the last 9 months was +-0, so i don`t expect them to lose a lot of the NCAV. But of course since its a commodity business a huge downmove in steel prices can turn them into real money losing machine. But the trend is our friend here, since steel prices are on the upmove, so this can also be a positive catalyst.

 

Since they have a stable NCAV and trade at ~50% of NCAV i think its a compelling investment case.

 

All numbers in million singapore dollars:

Current assets:

Cash and cash equivalents:          $21.4

Cash received for subsidiary:      $39.5

Dividend paid:                          -$13.4

Litigation:                                  $1.75

New Cash and cash equivalents:  $49,25

Accounts receivable:                  $40.9

Inventories:                              18.05

Other:                                      $7.85

Total current assets:                  $116.05

Total Assets:                            ~$128

Total liabilities:                        $22.43

Shares outstanding:              127417000

 

NCAV/share: ~0.735$

Cash/share:  ~0.21$

Current price: 0.37$

Price/NCAV: 50%

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It looks interesting. What is the game plan here though? What did the management say? OR are you simply betting on a turnaround of the business?

 

I just buy cheap and wait. See http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/aggressive-rebalancing/. Anything can happen with a netnet, but since they are already priced to go out of business most surprises are to the upside.

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I think this is a decent bet. It's a 4.5% position for me. I have been following the company since activist Quarz Capital Management sent an open letter earlier this year:

 

GEORGE TOWN, Cayman Islands, May. 31, 2017 /PRNewswire/ --

Quarz Capital Management, Ltd. (QCM), an investment manager, today issued a letter urging HG Metal Manufacturing Limited to take immediate steps to address the severe undervaluation of more than 60% which its share price is trading at to its highly liquid and easily valued intrinsic book value despite the commendable efforts of management in steering the company through one of the toughest slumps in steel prices. QCM proposes that HG Metal conducts a full strategic review on the potential divestment of its non-core but substantial 22.6% stake in BRC Asia with a market value in excess of SGD 30 million (67% of Mkt Cap). Quarz believes that multiple buyers are interested in building up substantial stakes in BRC Asia as evident by the unsolicited bid announced by the company recently. Any of the buyers could establish a near majority control of BRC with the purchase of HG’s stake and a proportion of additional market and selective purchases from other less substantial shareholders. Quarz proposes that part of this capital released can be returned to shareholders upon the completion of the sale through dividends or share buyback. Quarz also urges the company to immediately distribute up to SGD 10 million (22% dividend yield) of the excess net cash of SGD 29 million which is currently held by the firm.

(http://www.quarzcapital.com/en/research/hg-metal-manufacturing)

 

On 9 September 2017 the company announced the disposal of their BRC Asia stake and on 25 September 2017 a capital reduction and distribution of SGD 13.3 million to shareholders.

 

3 reasons why this is a buy:

 

1. Management seems to listen to shareholders

2. It's trading at a 44% discount to NCAV

3. Well positioned to take advantage of growth in south asian countries (Myanmar) and a recovery of the steel market in general

 

 

 

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