LB Aluminium (3) - Excellent Result, Profit Back To Previous All Time High

Author: Icon8888   |   Publish date: Fri, 25 Mar 2016, 08:28 PM 

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1. Introduction

The title of my previous article for LB was "Sun Rise or False Dawn ?". 



That was because in the previous quarter ended 31 October 2015, the group showed signs of turning around and I was not sure whether it will be able to sustain the momentum.

Today, LB released its January 2016 quarterly report. The result is very satisfactory. Looked like it is not a false dawn (touch wood).



2. Latest Quarter Result

Compared to previous quarter, revenue has not grown by much. However, EBITDA margin improved substantially, reaching an ALL TIME HIGH of 12.6%.



This item alone single handedly elevated net profit by almost 100% (compared to previous quarter).

As a matter of fact, in my previous article, I have identified EBITDA margin as an important factor to watch. Please refer to cut and paste below :-

 

In this latest quarter, it seemed that the group not only able to maintain the positive momentum, but improved further on it.

One of the contributing factor is of course the lower raw material cost (aluminium price was 1.8% lower). However, in my opinion, that should not be sufficient to deliver such strong growth in EBITDA margin. The group must have been successful in passing higher cost to customers, as mentioned in previous article.



3. Aluminium Price

For those not familiar with this group, let me point out (once again) that Aluminium is used as raw material by LB. As such, high Aluminium price will adversely affect the group, and vice versa. 

According to Index Mundi, latest Aluminium price is USD1,577 per MT.



This is an increase of 6.4% compared to LB's estimated cost of USD1,482 per MT during the period from November 2015 until January 2016. However, the Ringgit has strengthened from 4.328 per USD to 4.028 now. Based on the latest exchange rate, LB's estimated Aluminium cost is RM6,352 per MT. This works out to be approximately 1% lower than previous quarter's RM6,414 per MT.

Of course, the above figures are for discussion purpose only. The group's actual cost might be different as it is dependent on timing of buying, hedging policy, etc. However, the general idea is still that recent Ringgit strength could play a role in mitigating rise of USD Aluminium price. Let's wait for next quarter to find out the truth.



4. Concluding Remarks

I have only good things to say about this quarter's result. As mentioned in my previous article, LB has a difficult time in the past few quarters. However, it seemed that things had stabilised. Hopefully the positive momentum can be sustained. 

If you annualise the past 3 quarter EPS, you will arrive at EPS of 5.3 sen for FY2016. At current price of 50 sen, prospective PER will be 9.5 times.

However, if you annualise the latest quarter EPS, you will arrive at EPS of 8.4 sen for FY2017. At current price, prospective PER will be 6 times.

It is up to you to decide which EPS is more reflective of the group's prospects. Your money your choice.

LB Aluminium (2) - Sun Rise or False Dawn ?

Author: Icon8888   |   Publish date: Mon, 1 Feb 2016, 10:24 PM 

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1. Introduction

I first wrote about LB Aluminium in July 2014.
http://klse.i3investor.com/blogs/icon8888/56467.jsp

Many people don't understand what LB does. I have cut and pasted the relevant section from that article to give the readers a feel :-








2. Recent Performance



LB did well in FYE 30 April 2014. As a result, share price went up to as high as 90 sen in August 2014. However, in the subsequent financial year, it was adversely affected by the weak Ringgit which pushed up raw material cost (aluminium billets are imported). As a result, share price went on a downward trend (48 sen as at the date of this article). 



3. Aluminium Price

Together with other commodities, aluminium price declined from approximately USD2,200 per MT in 2014 to USD1,500 per MT in December 2015. 


(Past 5 years)


(Past 1 year)



4. P&L

To better understand LB, I studied the group's P&L from FY2009 until 1H of FY2016 :-



Key observations :-

(a) According to annual reports, the effect of higher or lower cost of aluminium will be passed on to customers. However, I believe this is only partial as in years of low aluminium price, the group's profit will increase, and vice versa.
For example : in FY2010, with aluminium price at USD5,645 per MT, EBITDA increased from RM31.2 mil to RM38.8 mil. The same happened to FY2013, FY2014 and Q1 of FY2015.

(b) It seemed that the group will do exceptionally well when aluminium price was lower than RM6,000 per MT (yellow highlighted).   

(c) According to the company, there will be a time lag before higher / lower cost can be passed on to customers. The following is extracted from FY2015 annual report :-



(d) It is difficult to determine how much revenue has grown in a particular year. This is because revenue is a function of both volume and selling price, which is influenced by aluminium price.

(e) Despite the drop in international aluminium price, the significantly weakened Ringgit caused import price to remain high. For example, in July 2015 quarter, aluminium price has declined to USD1,522 per MT. However, with Ringgit at 4.22, import cost was RM6,531 per MT, closed to the recent peak of RM6,683 in January 2015 when aluminium was trading at USD1,926 per MT.     

(f) In the latest quarter ended 30 October 2015, the group's EBITDA margin has almost returned to previous high (10.8% vs. 6.5% in July 2015 quarter).
According to commentaries, the group benefited from higher selling price. Cost pass through ? Is the recovery sustainable ?



(g) Low tax rate is due to the group's regular capex programme. Further details in next section.

(h) The group derives approximately 74% and 26% of its revenue from domestic and exports sales respectively. 



5. Cashflow


Key observations :-

(a) During the period from FY2009 until FY2014, the group channelled an average of RM2.6 mil per annum to finance increase in working capital.
This amount is not high, which is a plus point. Too much cash tied down in working capital will reduce free cash flow and depress Return On Invested Capital. 
The group saw a huge negative change in working capital in FY2015 due to increase in inventories. Exact reason unknown. One possibility is that the group stocked up on billets in anticipation of Ringgit depreciation.
This seemed to have benefited the subsequent quarters. In 1H of FY2016, draw down of inventories allowed the group to save RM17.6 mil in cash flow.  

(b) In normal years, the group spent around RM13 to 14 mil per annum for replacement of wear and tear. This is closed to the depreciation charges of approximately RM18 mil per annum.

(c) Every few years, the group will spend on capex to increase capacity as well as improve efficiency. It seemed that the money has not gone to waste. I arrived at this tentative conclusion after comparing the group's performance before and after capex. 
In FY2010 (before capex), with aluminium price of RM5,645 per MT, the group reported EBITDA of approximately RM38.8 mil. 
In FY2013 (after capex), with aluminium price of RM5,682 per MT, the group reported EBITDA of RM44.8 mil.

(d) The most recent capacity expansion was in FY2015 and is estimated to have cost RM27 mil (being RM41 mil less estimated annual wear and tear replacement of RM14 mil). According to annual report, the programme was completed in April 2015. However, due to weak Ringgit and softer demand (due to slow down in economy), looked like the positive effect has yet to show up. The following is extracted from FY2015 anual report :-


(e) The company paid out dividend consistently. Before FY2015, DPS is 1.75 sen per annum. In FY2015 and 2016, the company paid DPS of 2 sen (readers please double check). Based on current price of 48 sen, dividend yield is 4.2%. 



6. Balance Sheets


Key observations :-

(a) Despite 2 rounds of capex and annual dividend payment, balance sheets remained strong. Net borrowings increased from RM62.3 mil in FY2010 to RM72.4 mil in FY2016, an increase of merely RM10 mil over seven years. I don't have any reason to complain.  

(b) Latest net gearing is low at 0.27 times only.  



7. Concluding Remarks

(a) I don't think LB is a company with moat. It is not the kind of companies that can just sit there and the cash register will ring non stop.

However, it is also not the type of weak companies that get pushed around haplessly by forces of competition. Past experience showed that as long as they keep reinventing themselves (for example, by investing in new machineries and technology), they will be able to chalk up reasonable growth. 

The growth process will not be smooth though. It will be full of ups and downs, with raw material cost being the biggest determining factor. 

For example, the group did not do well immediately after capex in FY2011. However, in FY2013 and 2014, when good time returned, its profitability was elevated to a new height.

(b) With the bulk of the group's raw material imported, it should benefit from the recent strengthening of Ringgit. However, the jury is still out on how the Ringgit will fare going forward.

As mentioned above, the group can pass on some of the cost to its customers. The latest quarter result showed signs of margin improvement. We will have to wait for next quarter result to find out whether the recovery can be sustained.     

(c) In my opinion, the stock is currently trading at trough level. However, it is not a very sexy stock. I will be very happy if it can give me 20% to 30% return in one to two years time.
Just nice for a risk adverse old man like me.

LB Aluminium

Positive Momentum Despite Rising Raw Material Cost

Publish date: Thu, 24 Jul 2014, 03:41 PM 

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1. Introduction

Recently, strengthening of Aluminium prices generated a lot of interest in Aluminium related companies. 



(Aluminium prices has been going up since May 2014)


Among the stocks that attracted investors' attention are Press Metal, ARank and LB Aluminium ("LB").

Based on preliminary analysis, I am of the opinion that not all companies will benefit equally from strong Aluminium prices.

Press Metal, being a smelter, is an obvious beneficiary. 

In a previous article, I wrote about ARank, which produces aluminium billets by using,inter-alia, scraps and ingots.

ARank is considered an upstream player. However, its historical protifability does not seem to have strong correlation with Aluminium price movement.

In that article, I speculated that ARank's business model might be based on making "refiner margin". Namely, it makes a fixed profit margin independent of Aluminium price level.

One possible explanation is that ARank uses ingots and scraps as raw materials. The prices of these materials will go up and down with Aluminium prices, thereby offsetting any gain or loss resulting from the higher / lower selling price of the end products.  

How about LB ? Will stronger Aluminium prices benefit or hurt the company ? 
In order to answer that question, we need to have a better understanding of what LB does and where it is positioned in respect of the industry value chain.




2. LB's Business Activities

As mentioned in my previous article, ARank, an upstream player, produces Aluminium billets from scraps and ingots.



(Aluminium ingots)



(Aluminium billets)


The billets will be used by midstream producers to churn out interim products, which will then used by downstream players to transform into end products (industrial and household items).

(Note : midstream players can at the same time undertake downstream activities)

LB is a midstream player. It uses billets to produce "Aluminium profiles" through "extrusion process".





(Extrusion process - billets are fed from left hand side into a tunnel embedded in the machine. The machine then push the billet forward towards a die. As the billet has no where to go, it will come out from the die in the shapes the manufacturer wants it to be, called "Aluminium profiles")





(Die - billets are pushed against the die so that the desired profiles can emerge from the other side of the die as per specification)

(Aluminium profiles produced by extrusion process)


According to LB's website, the group has been in operation since 1985. 

LB is one of the largest aluminium extrusion manufacturers in South-East Asia. Its production facilities boast 14 extrusion presses with annual production capacity of 90,000 metric tonnes. 



(aluminium products for building construction)


(electronic components)


(furniture)


(transportation)


(sheets and coils)


(ceiling suspension system)


(fittings and accessories)



3. Basic Financial Information

Based on 248 mil shares outstanding and share price of RM0.75, the company has market cap of RM186 mil.



Based on historical profit of RM22 mil, PE multiple is 8.5 times.

Based on net assets of RM258 mil, cash of RM35 mil and loans of RM67 mil, the group's net gearing is 0.12 times only.




4. Historical Profitability

The first thing that comes to my mind is to find out what is the relationship between Aluminium prices and LB's profitability.

The following is the historical prices of Aluminium over the past five years.




(Aluminium prices over past 5 years. Based on visual inspection, estimated average price over past 5 years are USD / MT 1750, 2250, 2250, 2000 and 1750 respectively)


The following table sets out LB's historical P&L from FY2010 until FY2014 :-

FYE April	2010	2011	2012	2013	2014
Aluminium price	1,750	2,250	2,250	2,000	1,750
(USD /MT)
Revenue	347	355	365	391	416.4
EBITDA	37.7	30.2	28.2	44.2	46.8
>  depreciation	(15.1)	(15.7)	(18.1)	(19.2)	(16.5)
>  int expenses	(2.5)	(2.9)	(3.8)	(3.8)	(3.3)
>  int income	0.5	0.2	0.1	0.2	0.6
>  associate	0.2	1.4	1.3	0.8	0.0
>  Excp Items	(6.2)	(1.7)	2.1	(4.0)	(2.7)
PBT	14.5	11.5	9.9	18.2	25.0
Tax	(2.0)	(2.7)	(1.4)	(1.2)	(2.9)
Net profit	12.6	8.8	8.7	17.0	22.1
EBITDA margin (%)	10.9	8.5	7.7	11.3	11.2
tax rate (%)	13.7	23.7	13.8	6.6	11.5
Net margin (%)	3.6	2.5	2.4	4.3	5.3
EPS (Sen)	5.1	3.5	3.4	6.8	8.9

Key observations :-


(a) The group's EBITDA margin declined during the two years when Aluminium prices are particularly strong (FY2011 and 2012).

In normal years, EBITDA margin is consistently approximately 11%. However, in FY2011 and FY2012, EBITDA margin declined to approximately 8%.

Based on simplistic calculation, EBITDA declined by approximately RM10 mil when Aluminium prices moved up by USD500 (from USD1750 per MT to USD2250 per MT). This roughly translated into decline of RM2 mil EBITDA for every USD100 per MT increase in Aluminium prices.

The impact is midler than expected (which is a good thing).


(b) During FY2011 and FY2012 when Aluminium prices is high, there is no corresponding increase in LB's revenue. This implies that the group was not able to pass through the higher production cost to its end users. 

This is different from the cases of plastic packaging industry (Thong Guan, BP Plastic, etc) which will report higher selling price (and hence revenue) when raw material cost is high.


(c) The group has low average tax rate of approximately 10%, probably due to tax incentives arising from its capex programme.


(d) The group has been growing nicely over the past two financial years. Revenue increased from RM365 mil to RM416 mil during the period, more than doubling its earnings from RM8.7 mil to RM22 mil.

This positive momentum is very delighting. Hopefully it can continue going forward.



5. Expansion Plan


On 31 May 2014, The Star conducted an interview with the CEO of LB. The following are some of the salient points :-


(a) The group is contemplating major expansion this year, in line with the gorwing Aluminium extrusion industry in Malaysia. Target to finalise details by end of July.


(b) three years ago, the group underwent an expansion of capacity which cost about RM40 mil. The group has more or less digested the new capaciy and is ready to move on for more.


(c) The expansion, if any, will be internally funded.


(d) The group's factory is located at 30 acres of land at Semenyih.  There is another factory in Sarawak. Both factories operating at 70% capacity, which accoding to CEO, is an ideal level for the group (spare capacity needed to cater for surge in demand).


(e) lately, more and more developers are moving towards green index buildings. Typically such buildings will use more Aluminium, which augurs well for the group.


(f) LB currently holds 25% local market share. It exports 30% of its products.


(g) Expect steady growth of demand over next few years, in line with the country's economic growth.




6. Concluding Remarks


(a) Recent strengthening of Aluminium prices has generated a lot of interest among investors. As a result, stocks related to Aluminium industry has been actively traded.


In my opinion, Press Metal would be a clear winner. However, based on common sense, I have doubt that the LB group, which uses Aluminium as raw material, would benefit from the higher commodity prices. If anything, higher Aluminium prices should have an adverse impact on its profitability.



(b) It is against this backdrop that I conducted a study of LB. Pursuant to my analysis of LB's business activities and its historical P&L, I am more or less convinced that LB is a wrong play for high Aluminium prices.


Having said so, I am pleasantly surprised by the relatively muted impact the high Aluminium prices inflicted on LB in FY2011 and FY2012. This gave me an impression that the group is very well run and have certain level of sophistication and resilience.


Subject to further information and analysis, I am wondering maybe we shouldn't be too over concerned about higher Aluminium prices will adversely affect the group's profitability (unless there is a drastic spike, which I might need to revisit the whole scenario).


(c) I am beginning to like this group. It has been in business for a long time. Managment seemed very competent. Balance sheet is strong. There seemed to be a lot of positive momentum in the recent two years (beneficiary of Government's Economic Transformation Programme, in particular the buoyant construction and property industries ?).    
  
    
(d) As mentioned in Section 5 above, the group is positive over its immediate prospects and is planning to expand its production facilities. I think this is positive signal that the group is doing well.


(e) At PE multiple of only slightly more than 8 times, the stock is reasonably priced (undervalued, if you really want to hear me saying it).
No harm taking position. But please do it for the right reason - don't buy the stock because Press Metal is going up. These two companies are completely different stories.


Have a nice day.