Nov 26, 2004
The Business Times

NOTWITHSTANDING our recent earnings upgrade to reflect strong demand and price rises for steel products globally, HG Metal's FY04 results outperformed our expectations. The spectacular performance was driven by the trading business, where sales and Ebit (earnings before interest and tax) grew 67 per cent and 376 per cent year-on-year respectively to account for around 90 per cent of group earnings. This suggests trading volume grew faster than expected, to around 20,000 tonnes per month in FY04 from 12,000 in FY03.

Ebit margins more than doubled to 13.2 per cent from 5.6 per cent in FY03, suggesting it was able to pass on higher costs from higher oil prices and freight charges.

To reward supportive investors, it has proposed a special dividend of half a cent per share in addition to its final dividend of one cent per share, plus a 1-for-3 bonus issue.

Management expects 1H05 to be better. Reflecting the underlying strength of global and regional demand, especially as order books for most shipyards are full for 2005, HG Metal is confident that 1H05 net profit can exceed 1H04's $5.3 million. This supports our view that the group's medium-term earnings visibility is good. Our fair value has been lifted to 83 cents on the back of our earnings revision (before adjustment for the bonus issue). It is pegged at seven times FY05 earnings, down from 10 times previously as forecast risks are now higher.

However, this still implies strong upside potential of 45 per cent from current levels. HG Metal shares appear undervalued at 4.8 times FY05 PE (price-to-earnings), despite their recent run-up. The sterling FY04 results, coupled with an optimistic 1H05 profit guidance, the bonus issue, and speculative interest spurred by the purchases of former Links Island Holdings chairman Winstedt Chong and his wife, are likely to support the share price. We see potential re-rating for the stock in the near term.

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