B9S:SG – CosmoSteel Holdings

[mjohn707]

I’m not sure that anyone really likes to invest in a company that’s losing money.  There is something psychologically difficult about seeing your potential return melt away quarter by quarter, and there is always a chance that a potential turnaround situation gets worse instead of better.  Even so, I think that with a large enough margin of safety a money losing business can make a reasonable investment.  In many cases things aren’t quite as bad as they seem from a quick look at the figures, and in some cases because of the losses you’re able to invest in the company at a very distressed valuation.

 

I think CosmoSteel Holdings more or less fits this pattern.  The company is listed in Singapore and is engaged in the steel distribution business. Despite the current losses, I think the company is a decent investment assuming the steel industry eventually improves, with a reasonably protected downside due to the large discount from NCAV and low net debt.

 

At current prices the shares trade for about 31% of book value, 41% of NCAV, and around 60% of Graham-style liquidating value.  The company had a decent earnings record up until 2015 when earnings turned negative, and larger losses for 2016 and 2017.  The increasing losses are due in part to higher depreciation expenses from recent warehouse expansions and write offs for slow moving inventory.

 

The Ong family owns about 13% of the common stock and controls the company, and Hanwa, a trading company listed in Japan, owns another 10% or so that they purchased pretty recently at a much higher valuation.  Management salaries seem reasonable.

I’m attaching a copy of a spreadsheet with an 11-year summary of the company’s income and balance sheets, and a calcuaton of NCAV and liquidating value.  Shares are pretty illiquid so it might take a while to build a position.

 

Current Price:  0.109 SG

Market Cap:  32M SG

P/E:  N/A

P/B:  .31

CosmoSteel_Holdings.xlsx

[Foreign Tuffett]

It's definitely cheap, looks like an interesting idea.

 

Am I right in assuming their business model is very heavily dependent on the level of offshore oil and gas drilling activity?

 

Does management here have any history of dividends or share buybacks? In other words, did they show signs of being shareholder friendly when times were good?

[frommi]

It's definitely cheap, looks like an interesting idea.

 

Am I right in assuming their business model is very heavily dependent on the level of offshore oil and gas drilling activity?

 

Does management here have any history of dividends or share buybacks? In other words, did they show signs of being shareholder friendly when times were good?

 

They paid a dividend last year and announced a share buyback plan which they didn`t execute. With rising commodity prices i think its only a matter of time when they get back to profitability.

[mjohn707]

It's definitely cheap, looks like an interesting idea.

 

Am I right in assuming their business model is very heavily dependent on the level of offshore oil and gas drilling activity?

 

Does management here have any history of dividends or share buybacks? In other words, did they show signs of being shareholder friendly when times were good?

 

They paid a dividend last year and announced a share buyback plan which they didn`t execute. With rising commodity prices i think its only a matter of time when they get back to profitability.

 

 

Yeah like frommi said, they’ve paid a dividend in the past but they cut it due to the decline in business.  Offshore construction is a big end market from what I remember

[frommi]

Yeah like frommi said, they’ve paid a dividend in the past but they cut it due to the decline in business.  Offshore construction is a big end market from what I remember

 

Thanks, i just remembered that i got a dividend last year. Somehow i forgot that they cut it for this year (maybe thats the reason the share prices dropped the last two months?). I should take more notes. From the annual report:

 

Future Outlook

After more than two years in the doldrums, there are finally some encouraging signs that the oil and gas market is rebalancing, helped by an Organization of the Petroleum Exporting Countries (“Opec”)-led production-cutting deal among global producers. Oil supply overhang is normalising while oil demand has also been strong, driven by China, India and advanced economies. Indeed, according to Opec and the US Energy Information Administration, global demand is on track to exceed supply this year. We are heartened that oil market equilibrium is finally in sight. We believe that the various steps that we have taken in the past few years to strengthen the resiliency and operational efficiency of our business will put us in a stronger position when the market recovers.