May 29, 2004
The Business Times

WE are initiating coverage on HG Metal with a BUY recommendation. A leading steel stockist, it is set to enjoy strong earnings growth from its trading activities. Meanwhile, increasing manufacturing income will improve forward earnings visibility and enhance margins and returns.
  
Trading Ebit (earnings before interest and tax) is projected to triple to $12.1 million in FY04 on the back of rising steel prices. Steel prices have surged 30 per cent since the start of this year and are likely to remain resilient as infrastructure and shipbuilding projects continue to consume steel.

Rising manufacturing profits will provide a growing source of income. The group ramped up production capacity to 1,600 tonnes per month following the completion of a new steel pipe line in July last year. Meanwhile, profit margins are enhanced as manufacturing operations generate a higher return than trading activities. Potential overseas diversification into countries like China through strategic alliances or tie-ups could open up new export markets. This will reduce reliance on Singapore as a revenue source and strengthen the company's position as a regional stockist and manufacturer.

Valuation is attractive, at 4.6 times FY04 earnings versus growth averaging 68 per cent over the next three years. The share price is likely to be re-rated upwards when investors focus on the strong earnings potential.

BUY.