Nam Lee Pressed Metal Industries

Nam Lee Pressed Metal Industries designs, manufactures and installs aluminium and steel products, such as door frames, gates and sliding windows / doors. These products are used for houses and flats. Nam Lee also builds mainframes for container refrigeration units. The company is listed in Singapore (ticker: SGX:G0I).

There’s already a good write-up about this company, published last year by Alpha Vulture. I think that article sums up the investment case well and not too much has changed in the past year, so you should read that article for the main information about Nam Lee. I’ll discuss some of the developments since last year.

Last month Nam Lee published their results for fiscal 2014. Revenue has slipped 17% from SGD$171m to $141m and net income was down 21%, from $9.0m to $7.2m. The Singapore property market has slowed down, which hurts Nam Lee’s revenue. Management expects the slowdown to continue and also expects increased competition to put pressure on profit margins in the coming year.

Inventories and receivables both decreased significantly and contributed to the operating cash flow of $25m. In 2013 they had negative operating cash flow of almost $15m. Some lumpiness in free cash flow is to be expected considering the industry that Nam Lee is in.

In the past year the company purchased a leasehold property for $6.35m which will be used as a factory and office. That explains the much higher capital expenditures of $9.9m in 2014, compared to just $3.4m in 2013.

Nam Lee is probably one of the more attractive net-nets that are still out there. The market cap is currently $67.6m. Net current asset value on Sept. 30 was $84.1m. The company trades for 0.80 times NCAV and 0.56x book value. Nam Lee has a cash balance of $35.5m and total liabilities of just $19.9m. The cash and NCAV calculation excludes a $6.1m bond investment, which is classified as a non-current asset, but it can probably be regarded as cash equivalent.

The main thing I do not like about Nam Lee is their customer concentration. Last year their largest customer was responsible for 45% of revenues. Alpha Vulture and some posters on the Valuebuddies forum think this customer is probably Carrier. Obviously losing this customer is a risk. I don’t have much to add. I think the way to deal with it is to size your positions appropriately. Unless you have unusual insight about the relation between a company and its major customer(s) it seems like a bad idea to make that company a major position in your portfolio.

In terms of valuation, I think the company should be worth at least book value. Average earnings over the last five years have been $10.2m. Given the tougher operating environment right now it is probably better to be a bit conservative and expect perhaps average earnings of $8-9m over the next few years. If we give Nam Lee a multiple of 10x and add to that the excess cash on the balance sheet we get a value that is right around book value.

Nam Lee announced that they will pay a 1.5 cent dividend, which gives the stock a yield of 5.4% at the current share price of $0.28. It is certainly nice to get paid a decent dividend for waiting, because you never know how long you have to wait before the market warms up to a stock like Nam Lee. I think I have owned the stock for about a year and the price has declined a little since I first bought. After the announcement of the results in November I bought a little more. Nam Lee is one of the cheaper stocks I can find right now and the discount to NCAV and the large cash balance should give it a margin of safety.

Disclosure: long Nam Lee Pressed Metal Industries