SI Research: Asia Enterprises Holding – Strengthening Your Portfolio

The consumption of steel is highly cyclical and generally follows the industrial and economic conditions. Since the subprime crisis, global steel prices have fallen from a high of US$1,265 per tonne to below US$200 per tonne in first half of 2016. However, signs of steel prices bottoming out have appeared, with prices of the commodity climbing back up to about US$312 per tonne.

In addition, global economies are starting to pull back from monetary easing and future growth policies will likely be tilted towards that of fiscal nature. Ultimately, we see brighter prospects for the steel industry where demand will come from higher infrastructural spending by governments. As such, we interviewed Asia Enterprises Holding (Asia Enterprises), a steel trading company listed on the local bourse, and hereby present our findings.

About Asia Enterprises

Asia Enterprises is by and large a steel trading company that procures, distributes, engineers and fabricates steel products to industrial end-users in Singapore. Incorporated in 1961, the company listed on the Mainboard of the Singapore Exchange in 2005.

With a ready inventory of more than 1,200 steel products, Asia Enterprises serves over 700 active customers in the offshore and marine, oil and gas, as well as the construction industry. Its customers are primarily from Singapore, Indonesia and Malaysia.

A Safe, Adaptable Player

The company is, what we could say, one of the companies with the most robust financial position. Since its listing in 2005, the company has maintained a very low gearing level. In fact, it paid off most of its debt by FY07 and has held near-zero debt ever since. As of its latest quarter 3Q16, the company was debt free and this is important in an economic downturn where excessive borrowings have caused companies to turn belly-up.

We look further into the company’s balance sheet for the past eleven financial years for more details. From FY05 to FY15, the company’s current ratio was consistently above ten times while quick ratio was always above five times. In 3Q16, the company’s current ratio and quick ratio was 17.7 times and 15 times respectively. Thus, upon taking a quick look at its balance sheet and one could easily conclude that the company mostly never experienced solvency issues or liquidity hiccups.

Cost-wise, the company’s administrative and distribution expenses generally accounted for more than 95 percent of the total expenses. Yet, throughout the financial period FY05 to FY15, the amount fluctuated only between $6 million to $11 million. Correspondingly, the selling, general and administrative expense (SGA) margin fluctuated between 4.5 percent and 6.7 percent, making its operations seem rather lean. Even though SGA margins increased to 22.7 percent by 3M16 due to revenue taking a hard beating amidst the economic slowdown, SGA expenses still remained low, at about $5.5 million only.

A Net Cash Stock

Consequent to its slim costs, Asia Enterprises’ cash flows were generally healthy. Nine out of the eleven financial years since listing, the company had posted positive figures for levered free cash flow, with an aggregate net amount of $88.8 million.

In the same period, the company built a cash and equivalent holdings from $25 million in FY05 to $64 million by 3Q16. Against total liabilities that amounted to only $5.4 million, Asia Enterprises boasted a net cash position of about $58.6 million; representing 95.4 percent of its current market capitalization of $61.4 million. Owing to the fact that the company written down $9.8 million of its inventories in FY15, we further assume the remaining steel inventories are highly liquid and can be readily converted to cash. Its eventual net cash position would be about $71.5 million, outweighing its market capitalisation by 1.2 times.

With 341.1 million shares outstanding, the net cash per share (without inventory conversion) would be about $0.17 per share while the net cash per share inclusive of inventory conversion would be about $0.21 per share.

Cheap Bargain Or Value Trap

As of 28 November 2016, the shares of Asia Enterprises are trading around $0.18, which equates a little less than 0.7 times price to book value. Trading at more than 30 percent discount, one may wonder if they are in for a good deal. With each share backed by $0.17 worth of cash, the market is inherently valuing the operations of Asia Enterprises at only $0.01 per share, for an inventory that is essentially worth $0.04 per share (take $0.21 minus $0.17).

Based on its last full FY15 dividend of $0.005 per share, the dividend yield at current trading price is about 2.8 percent. Comparatively, the current five-year Singapore Government Securities as at 28 November 2016, would have only offered a yield of about 1.7 percent hence making the shares of Asia Enterprises look relatively more attractive.

However, going back to the company’s revenue front, sales have been on the downtrend since it peaked in FY07 at $182.9 million. The company reported its lowest revenue of $32.3 million in FY15, representing a compounded annual growth rate of -19.5 percent. In the latest 9M16, revenue dropped another 2.7 percent lower from the previous year, at $24.5 million. Despite having returned to profitability, investors should be wary that further prolonged dampening of sales will put pressure on the bottom line and hence, limit the potential for shares to appreciate in price in the short term.

A Safe Bet Only

With an already lean operation, the only key left missing to restart the engine for Asia Enterprises is the right economic conditions that would allow it to boost its topline. However, as a conventional business, investors should not expect explosive growth trajectory.

Meanwhile, to preserve shareholders’ value, Asia Enterprises seems embarked on hoarding more cash and keeping inventories lean amidst the current uncertainties in the market. Hence, investors could consider adding cash-backed stocks like Asia Enterprises to increase the resilience of their portfolio.