Shares price of GMUTUAL (9962) touched intraday high of RM0.525 on 13/8/14 after I posted this undervalued stock in my blog before market open. This stock has attracted attention of investors as the daily volume transacted over RM4 million shares after being thin traded for the past few months.

Here is another undervalued stock – LEONFB (5232)

Background

Leon Fuat Bhd (LEONFB, 5232) is an investment holding company while its subsidiaries are principally involved in the trading and processing of steel products, specializing in rolled long and flat products. The Group also provides value added services such as cutting, leveling, shearing, profiling, bending and finishing of products according to customers’ needs. LEONFB was listed on the Main Market of Bursa Malaysia on 5 June 2013 with IPO price of RM0.60.

1. Good Experience in Industry

LEONFB started as a family business back in 1972, having been cofounded by three siblings – Mr. Ooi Bin Keong, Mr. Ooi Kong Tiong and the late Mr. Ng Chee Tiang. In the early days, the primary business emphasis was trading of steel products. Over time, the business expanded to include processing activities. While carbon steel remains its core focus, LEONFB also trades and processes other steel products such as stainless steel and alloy steel.  At present, Mr. Ooi Bin Keong continues to lead LEONFB as the Group Managing Director while co-founder Mr. Ooi Kong Tiong serves as the Executive Director.

2. Strong Shareholders

In terms of shareholding structure, the Ooi and Ng families control the Group via its vehicle, Leon Fuat Holdings Sdn. Bhd., which holds an equity stake of approximately 70.87% in LEONFB. Other substantial shareholder is Lembaga Tabung Angkatan Tentera (LTAT) with 5.5%-stake.

3. Offer Wide Range of Products

LEONFB stocks up various types and dimensions (eg. varying thickness, width, length and diameter) in order to cater to its customers’ needs. Additionally, a more specialized range of quenched and tempered steel is also available for customers looking for products with high wear resistant as well as high hardness and structural strength.

4. Large Clientele

Given the nature of LEONFB’s business as a trading house complemented by its processing services, it has a diverse pool of customers numbering close to 4,000, and none contributed more than 10% to the Group revenue. On average, its top 500 active customers contribute approximately 85%-90% to its turnover, and over 90% of them are repeat customers.

5. Good Track Record

First and foremost, it has established a proven track record in product quality and service reliability, as evident in the high number of repeat customers at the Group. The next plus factor includes the variety of product offerings that serves as a one-stop shop for its customers. In addition to that, LEONFB’s in house processing facilities enable its customers to customize the products according to their requirements in a speedy manner without compromising quality. Its trading and processing activities allow management to achieve economies of scale by procuring in bulk and enjoying volume discount.

6. Consistent Earning

The local steel industry has been in the doldrums over the past few years due to slowdown in demand for steel products and issues of global overcapacity that resulted in dumping activities by some overseas manufacturers. However, while several local steel manufacturers are loss-making, LEONFB has been consistently profitable during this period.

The consistent profit track record despite the present predicament in the steel industry was principally due to its focus as a trading house that provides value-added services. As a trading house, the Group’s business model is mainly on cost-plus basis and it does not carry too much inventory which is susceptible to fluctuation in pricing. Meanwhile, all its processing services are carried out based on secured orders from customers.

LEONFB recorded Profit Before Tax for the past 5 years. The PBT was consistent over the past 5 years as follow:

            2009 – RM24.0 million

            2010 – RM29.2 million

            2011 – RM33.8 million

            2012 – RM33.4 million

            2013 – RM35.4 million

7. Health Balance Sheet

Net gearing improved to 0.5x in 1QFY14 from 0.6x as at end-December 2013, while BV/share rose slightly to 67 sen from 65 sen. 99% of its outstanding loans are short-term in nature, which are mostly trade finance in relation to purchases of raw materials.  Trade receivables, at 90-odd days, also fall within the credit terms given by the Group, which range between 60 days and 120 days. As most customers are repeat buyers and have established good relationships with the Group, bad debts and impairment loss on receivables appear to be negligible at less than 0.1% of Group turnover. Inventory too, appears healthy at about 4 months, which could be considered to be a norm in the industry.

8. Consistent Growth

Management of LEONFB will continue to grow the Group on a gradual and steady manner in order to sustain profitability and steer through the current challenging environment in the steel industry instead of undertaking aggressive growth path that may carry higher operating risks. As such, LEONFB is expected to achieve a modest 5%-6% top line growth in revenue in FY14 to RM487.7 million. The net earning is expected to grow faster by 7.1% y-o-y to RM26.2 million in FY14.

9. High Dividend Yield

LEONFB paid dividend of RM0.03 (FYE 2013). This has translated into dividend yield of 5.7%.

10. Trading at Discount

LEONFB’s share price is trading at discount of 20% based on NTA of RM0.65 in FYE 2013.

11. Potential Re-value of Properties

LEONFB has several properties that last valuation was conducted for past 10 years. The properties should worth more than 100% if re-valued. Here are some undervalued properties.

Those properties will worth extra RM39 million if re-valued at 100% appreciation of price. This will increase LEONFB’s NTA to RM0.77.

12. Shares Price Still Trading at Low Level

Price of LEONFB still trading below IPO price of RM0.60 The price only up around 10% since beginning of 2014 (closed at RM0.475 on 2/1/2014).

13. Low PER

LEONFB is trading at PER of 6.25 while steel industry is trading at average PER of 12.67. Below  is the comparison of PER between LEONFB and other steel companies.

LEONFB is expected to be traded in PER of 10X in long term.

Target Price

Short Term Target : RM0.72 (based on PER of 8X)

Long Term Target : RM0.90 (based on PER of 10X)  

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