CosmoSteel Holdings Limited – Q1 2017

Q1 2017– 0,136 S$– SGX:B9S

1kr50öreCosmoSteel Holdings Limited is a Singapore-based investment holding company. The Company’s segment includes Energy, Marine, Trading and Others. Its Energy segment includes oil and gas; engineering and construction; petrochemical, and power. Its Marine segment includes shipbuilding and repair. Its Trading segment includes traders purchasing goods and on-sell to end user customers. Its Others segment includes other industries, such as the manufacturing and pharmaceutical sectors. It offers various products, such as Pipes, Flanges, Forged Fittings, Outlet Fittings, Buttwelding Fittings and Others. Its pipes product includes electric fusion welded and spiral welded. Its flange product includes socket weld and threaded. Its forged fittings product includes elbow and Tee (equal, reducing and cross). Its outlet fittings product includes Nipple Olet and Buttweld Olet. Its Others product includes Plates and I Beams. Its services include fabrication capabilities, and validation and testing. – Google Finance.

1. The company is currently a net-net with an adequate margin of safety: 

a)

  • P/NCAV < 1x
    • 0,46x 
    • MoS = 54 %

Assessment of margin of safety:

CosmoSteel makes it through the net-net checklist without any difficulties. Beyond that statement there are five additional facts that in my opinion makes CosmoSteel at the current share price a good addition to a diversified portfolio of net-nets

First, CosmoSteel is today selling at a large margin of safety to NCAV, 54 %. In addition, looking at recent reports that margin of safety seems to be quite solid since the NCAV burn rate for QoQ is positive (2,3 %) and YoY only slightly negative (-2,4%). Second, regarding historical profitability. Although the company has posted negative results for the last two years (mainly due to the historically low oil price) that has not been the case historically. During the period 2014-2007 the company had an average profit margin of 6,5%, with a high of 10,5 % (2007) and a low of 3,5 % (2014). Third, regarding valuation in relation to historical average operating profitability. Taking into account the two last year’s negative results, the valuation multiples still look quite appetizing. The company’s 5y and 10y average operating earnings in relation to the current enterprise value amount to 7x and 4x respectively. Fourth, regarding capital allocation. The company has during the last nine years continuously paid a dividend to shareholders and although there has been some historical dilution of shareholders there is currently an active share buyback mandate for 10 % of the shares outstanding. Fifth, regarding ownership structure. Insiders together own about 16,7 % of the shares outstanding. That ownership is mainly related to the two brothers Ong Tong Yang and Ong Tong Hai which serve as directors of the company. Their father is the founder of CosmoSteel and he still serve as the CEO of the company. The Ong family definitely have skin in the game since the current value of their total ownership amounts to 4,7x their total annual compensation.

2. The risk of permanent loss is low:

2.1 The risk of bankruptcy is low (criterion a) or b) must be met):

a)

  • Debt/Equity < 25 %
    • 15 % 

b)

  • Z-score ≥ 3
    • 2,4 X

2.2 The company’s business model has historically been profitable (criterion a) or b) must be met):

a)

  • Positive retained earnings:
    • 43,8M S$ 

b)

  • Positive aggregate operating income for the last ten years:
    •   89,3M S$ 

3. The company does not have a shareholder unfriendly capital allocation:

  • Shareholder yield TTM ≥ -2 %
    • Dividend yield TTM = 4,2 %
    • Net buyback yield TTM = 0 %
      • =  4,2 % 

MoS

Disclosure: The author is long SGX:B9S when this analysis is published. Also note that SGX:B9S is a micro-cap stock (28 M$ in market capitalization). The trading is illiquid.

 

3 thoughts on “CosmoSteel Holdings Limited – Q1 2017

  1. Hi Mate,
    another great find and beautiful analysis. Just a quick question:
    What do you subtract from the top line to calculate operating income?
    Cheers

    Like

  2. Thanks for the positive feedback 26! Btw I regret I didn’t take you up on the tip about SP Corporation earlier 😉

    I define operating income as: Revenue – COGS – SG&A – D&A

    If we take the annual report for CosmoSteel 2016 as an example I include the following in the calculation (http://cosmosteel.listedcompany.com/misc/ar2016.pdf):

    Revenue = 68,757
    Cost of sales = -53,827
    Depreciation expenses = -5,609
    Marketing and distribution costs = -6,137
    Administrative expense = -7,161

    = -3,977

    Depending on legislation (US GAAP vs IFRS etc) there can sometimes be differences for what the company state themselves to be their operating income. Thats why I try to stay strict to my “own” definition.

    Hope that answers your question 🙂

    Like

  3. Thanks mate!
    Me too, I regret not having it done myself. Just on ‘paper’. But there will be more to come, no point regretting. I love that you share your analyses and will do the same over time.

    Thanks for your detailed explanation on operating income. Looking at it in this way makes a lot of sense to me especially considering the differences in legislation.

    Cheers!

    Liked by 1 person

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