(Sept 4): Nam Lee Pressed Metal Industries’ business of making steel and metal parts is not growing at an exciting pace. In fact, as Phillip Capital analyst Richard Leow points out in an Aug 15 note, the company’s business might be considered “mature”. However, Leow says Nam Lee’s earnings are also “stable”. “We view Nam Lee as a yield play.”

Three quarters into the current FY2017 (the company has a September year-end), Leow is confident that Nam Lee can maintain last year’s dividend payout of two cents a share. Based on the stock’s closing price of 37 cents on Aug 28, this translates into a healthy yield of 5.4%.

“With the ample cash on the balance sheet, we believe in Nam Lee’s ability to maintain FY2016’s dividend of two cents a share in FY2017. Positive surprise will be from higher- than-expected dividends being proposed,” says Leow, who has a “buy” call on the stock and a price target of 51 cents.

Leow’s target implies a forward earnings multiple of 11.5 times — considerably lower than the Straits Times Index’s forward multiple of 14.8 times. Nam Lee’s projected yield is higher than the STI’s yield of 3.2%.

On Aug 14, Nam Lee reported its numbers for 3QFY2017 ended June 30. Earnings for the first nine months increased 2.2% y-o-y to $8.1 million, while revenue was down 2.5% y-o-y to $95.2 million. Leow observes that the company’s numbers thus far represent 71.3% of his revenue forecast and 80.6% of his earnings forecast. He attributes the better-than-expected net margin of 8.5%, up from 8.2% in the same period last year, to the company’s ability to rein in costs.

In a commentary accompanying its results, Nam Lee’s management has adopted a cautious tone. “The continued uncertainty of the global economic environment, coupled with a slowdown in the local property market as a result of [the] government’s cooling measures, hefty supply of properties, intense market competition and tight labour market, is expected to exert pressure on the group’s profit margins in both [the] aluminium industry and building product businesses,” it says. “In view of the above circumstances, the group will continue to focus on improving operational efficiency and cost control measures to maintain the competitiveness of its businesses.”

Nevertheless, Leow is confident in Nam Lee’s ability to keep paying dividends, thanks to the company’s cash balance of $45.5 million as at June 30 this year. The current cash hoard translates into 18.9 cents a share, or roughly half its current share price, based on its share base of 241.3 million shares.

The company is also seen as undervalued from a book value perspective. As at June 30, Nam Lee’s net tangible assets stood at 54.3 cents a share, up from 53.2 cents a share at end-FY2016. This means Nam Lee is currently trading at 0.68 times its NTA.

Nam Lee was founded as a metal fabrication business called Chop Nam Lee in the 1950s by late patriarch Yong Kwong Fae. It was incorporated in March 1975, when it took on its current identity. The company has supplied materials to notable projects such as The Pinnacle @ Duxton, Business Centre at International Business Park and the Jurong Data Centre.

The Yong family, now led by chairman Yong Koon Chin, remains very much in control of the company. Other family members on the board are Koon Chin’s brothers: managing director Yong Kin Sen and executive director Yong Poon Miew.

According to the company’s most recent annual report, Nam Lee’s largest shareholder as at Dec 14, 2016 was Nam Lee Holdings, the Yong family’s vehicle, which holds a 58.4% stake. The three brothers on the board own direct stakes as well. Koon Chin holds 0.04%; Kin Sen, 0.5%; and Poon Miew, 0.16%.

Nam Lee’s ‘mature’ business makes for an attractive, stable yield play

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