Lysaght - back on growth path?

 

Lysaght Galvanized Steel Berhad (LGS), was listed on the KLSE on 28 June 1994. 
No of shares outstanding : 41.58 mil.    Market capitalisation : Rm153 mil

Business/Products

The products manufactured by LGS have wide applications specializing in infrastructure development projects.  The company is principally involved in the manufacture of galvanized steel poles, masts and towers.  The poles and masts are mainly used as lighting columns for streets, highways, transport terminals, traffic interchanges, airports, ports, sports complexes and stadiums, golf courses etc.  As for tower products, they are mostly used for supporting overhead power transmission lines and power substation structures and for mounting high voltage equipment.  These products are marketed through Lysaght Marketing under several registered trade name such as Lycorpole and Safe-T-Pole

Past 6 years Financial Performance

Income Statement

	2016*	2015	2014	2013	2012	2011
	RM	RM	RM	RM	RM	RM
Revenue	65,403,000	63,887,049	65,242,014	79,515,477	79,318,019	57,267,504
Cost of sales and services	(38,983,000)	(37,951,843)	(41,073,151)	(51,318,489)	(54,292,227)	(40,030,684)
Gross profit	26,420,000	25,935,206	24,168,863	28,196,988	25,025,792	17,236,820
Other operating income	4,823,000	7,387,217	3,256,382	4,627,929	3,158,258	3,295,608
Administrative expenses	(8,224,000)	(9,204,418)	(9,114,207)	(9,202,575)	(8,461,004)	(8,597,839)
Selling and distribution	(3,918,000)	(3,743,824)	(3,677,350)	(4,225,713)	(4,208,082)	(1,857,003)
Other operating expenses	(53,000)	(59,114)	(111,968)	(219,170)	(190,644)	(71,096)
Profit from operation, EBIT	19,048,000	20,315,067	14,521,720	19,177,459	15,324,320	10,006,490
Taxation	(4,010,000)	(4,009,730)	(3,287,075)	(4,104,176)	(3,591,426)	(2,279,455)
Net Income	15,038,000	16,305,337	11,234,645	15,073,283	11,732,894	7,727,035
DPS, sen	0.07	15.00	50.00	12.00	12.00	10.00
EPS	0.36	0.39	0.27	0.36	0.28	0.19

 

*Note : FY 16 – drop in Net Income mainly due to lower Other Operating Income (FY 15 - Rm3.8 mil gain from disposal of Investment Property). After the dip in FY14, Lysaght’s income is back to growth path.

 

Cashflow

	2016	2015	2014	2013	2012	2011
	RM	RM	RM	RM	RM	RM
Net Cash generated from operations	3,613,235	20,204,422	19,784,834	22,752,296	(11,531,804)	8,812,218
Free Cash Flow (FCF)	3,000,235	19,900,877	18,724,425	9,360,768	(16,993,010)	8,109,346

 

Financial Position

	2016		2015	2014	2013	2012	2011
	RM		RM	RM	RM	RM	RM
Assets
Cash and cash equivalent	61,582,000		62,391,443	33,165,022	39,325,629	33,065,166	52,774,699
Other Assets	42,381,000		34,906,277	42,953,059	49,909,530	57,010,033	31,784,538
Total current assets	103,963,000		97,297,720	76,118,081	89,235,159	90,075,199	84,559,237
Property, plant and equipment	30,492,000		30,923,757	31,278,440	32,375,368	20,297,446	16,257,835
Deferred Tax Asset	8,000		7,871	7,871	7,871	7,871	7,871
Investments	131,000		130,523	2,739,282	2,038,139	2,093,341	2,148,543
Total non-current assets	30,631,000		31,062,151	34,025,593	34,421,378	22,398,658	18,414,249
Total Assets, TA	134,594,000		128,359,871	110,143,674	123,656,537	112,473,857	102,973,486
Liabilities
Trade Account Payable	2,949,000		8,325,187	8,533,031	7,799,120	7,145,054	6,353,423
Other Payables	3,957,000		1,475,308	1,063,208	924,940	1,452,785	710,642
Total current liabilities, CL	6,906,000		9,800,495	9,596,239	8,724,060	8,597,839	7,064,065
Other payable	14,000		179,477	181,307	181,307	188,299	196,867
Deferred tax	586,000		568,367	566,701	581,614	506,459	567,356
Total non-current liabilities	600,000		747,844	748,008	762,921	694,758	764,223
Total liabilities	7,506,000		10,548,339	10,344,247	9,486,981	9,292,597	7,828,288
Equity
Common stock	41,580,000		41,580,000	41,580,000	41,580,000	41,580,000	41,580,000
Reserve	4,566,000		4,089,871	2,383,103	2,208,277	1,303,664	1,343,222
Retained earnings	80,942,000		72,141,661	55,836,324	70,381,279	60,297,596	52,221,976
Total common equity, E	127,088,000		117,811,532	99,799,427	114,169,556	103,181,260	95,145,198
Total liabilities and equity	134,594,000		128,359,871	110,143,674	123,656,537	112,473,857	102,973,486

 

Key Financial Metrics
Metrics
Price	3.6
Indicative Value	4.6
Margin of Safety	22%
PB	1.18
PE	10.0
P to CFFO (operating CF)	14.5
EV/EBIT	4.6
EY = EBIT/EV	22%
P/FCF	21.3
Average ROE	13%
ROIC (Average)	21%
FCF/ Market cap  ( cash yield)	5%

 

Overall metrics are reasonable, do not seem to be in deep value and average Cash yield of 5% is slightly on the low side from my minimum required 6%. However, the Earnings Yield EY of 22% and ROIC of 21% made the company attractive and it requires very low Capex to operate, hence not much capital expenditure spent over the last 5 years. In addition, the consistent dividend yield (though latest yield has dropped to 1.9%) and debt free with cash per share of Rm1.43 was another reason (in 2016 , it has reduced the dividend payout under the new “management” as the former CEO has left after the family tussle in trying to control the board). Lower dividend for FY 16 (7sen ) vs FY 15 (15 sen) has alerted me to keep an closer eye on this stock whether I need to action on it.

Indicative Valuation

DCF method :

 – derived from Discounted Cashflow (DCF) basing on average FCF from the last 6 years, discount rate at 11% and growth at 4% p.a  DCF method shown indicative intrinsic value at Rm4.6 and this provide a 22% margin of safety.

 

Note: the spike in 2014 was due to proposal for bonus issue by the former CEO but subsequently aborted where the daughter of the founder gained control of board and rejected the proposal and also argument whether a mandatory general offer should be made . On the surface, the family tussle to control the Company should be over now.

 

Q1 FY17 results has just been released and some indicators are showing the revenue could be on uptrend again – especially Malaysia and Australasia. It has achieved EPS of 10.68 sen for Q1 FY17 which is commendable and revenue for Q4 2016 & Q1 2017 were more than Rm 20 mil now.

 Low FCF in FY16 and Q1 FY17 – it has paid down its Payable and Receivables average 90 days looks reasonable, the concern is its inventories is high in recent years - the stock turnover is low, hence, I would continue to monitor its Inventories whether it increases to cater for stronger sales ahead or lots of obsolete stock. Should the current revenue be continued for the next 3 quarters, the profit for FY 17 could be a new record for Lysaght.  As the results are within my expectation ( I have concern when the dividend was reduced in FY16 though I quite like its asset light business model), I would continue to hold this slow growth, zero gearing and net cash company (Rm1.43 cash per share).