AEI Corp (AEI SP)

Dear all,

My sincere apologies for the long period of silence. It has been a trying year for me. I got work as a project based consultant and the busy (and largely erratic) work schedule resulted in less time for investments. In my opinion, if I do not have time to give quality analysis and recommendations not only for myself, but also for readers and investors alike: I will refrain from writing. This is a way to avoid pushing the limits of multi tasking.

I will continue to write as it is therapeutic process for me to invest, think and write and thank you for all your encouragements. I am glad that my past posts have contributed to your wars against poverty. Please do keep your emails and stock or any other investment views/suggestions (if any) coming in.

While I was certainly delighted that my holdings all rose in value, it does not correspondingly reflect a rise in firms' performance and their operating matrices. Most firms in the broad consumption theme have largely recovered from their earnings, giving rise to the 100-200% jump in earnings (excluding the Commodities and Marine giants, likes of Keppel and Sembmarine etc which are a different animal on that front). On closer look, many firms' earnings are normalizing, for example Johnson n Johnson, GE, Nestle, Samsung, Hon hai, Mitsubishi etc. BYD and Chalco were extreme examples though.


The fact that large caps are laggards versus the small caps (even in Asia) also shows the optimism (or rather overoptimism) in investors. The effect of QE2 will also further bring a support (although a highly unstable one) to equities vis-a-vis credit.

The focus will still be on undervalued counters and to maximize compounded returns (of which I have not fared too well this year) despite the macro outlook. I bring you my write up on AEI corp written a few months back before its dividend payout as well as the follow up write up. As mentioned, I have a couple of ideas in mind however it is not attractive from a price point perspective. 

1. Background 
• Only Aluminium extrusion firm with a manufacturing base in Singapore 
• Products include 
• Precision - electronics, clean room and automation equipment (80-90% of sales)
• Infrastructure - public works, interior designs, signages and advertisement panels (10%)
2. Financials (From 2002 to 2009) 
• 261.196 mil shares * S$0.21 = mkt cap S$54.85 mil
• Equity grew at CAGR of under 12% for 7 years (ex dividend) (not fantastic but not bad either)
• ROE at least 10% for most years except 2007 (6.9%) and 2004 (8.7%) despite 0 leverage
• A loss of S$5.78 mil in 2008, the only down year since 2002 due to:
• skyrocketing aluminium prices
• S$ 4 mil impairment of convertibles in a China JV for Aluminium products
3. Why buy 
• Only firm with facilities in Singapore, allows for fast turnaround and altering of prototypes
• Experience and network in Singapore (KK hospital, NUS, SIA building, Great world city, Shangri La Sentosa, Clark Quay MRT and Sg-Msia Johor link) 
• Strong financials with real recurring owner's earnings and current price implies a dividend yield of over 13% for 2009. Firm is able to support this for another 4+ years without gearing up.
4. Risks 
• Spike in LME aluminium prices (considerable current risk)
• Slump in electronics and SG construction orders (unlikely since strong recovery in 2Q09)
• Firm does not hedge its USD exposure (Electronics)
5. Expectations 
• 261.196 mil shares * S$0.165 per share = mkt cap S$43.097 mil
• Planned capex in extrusion plan to cost S$ 6 mil 
• End of yr est.cash and equivalents around S$ 22-25 mil (53% of mkt cap)
• This excludes:
• S$3 mil convertible loan given to An Yang (Well Global) (recovered)
• US3 mil or S$3.513 mil in convertible loan to M2B of $6.513 (approx $6 mil). 
• M2B loan is fully guaranteed with assets worth S$200mil, far above loan amount and 200% above current market cap even if is discounted by half.
• I would expect it to trade 
• With FY09 profit at $8.54 mil, its around 5x PER
• Lowest price point will be 4x PER (only S chips trade below that), downside of 18%+
• Conservatively at 7-8 x 2009 PER, or S$ 59 - 68 mil, or S$0.22 - 0.26, 36-57% upside

Post August 2010 - What has changed?

• I realized cash for this firm is largely irrelevant, however it remains a statistical play rather than a business operations play (so do not expect outsized returns)
• Strong earning base (although volatile) and the asset coverage is much more crucial
• Judging current conditions, of the 3 risks, seems that only #1 is likely but thats offset by a weak USD
• With aggressive buybacks, shares are at 256.39 mil x S$0.155 = S$39.7mil mkt cap (4-5x PER)
• The firm had its scare as 1H earnings plunged to a loss, however as mentioned MTM swings (S$4.1mil for the firm) should not affect judgement unless it is highly probable
• Without the MTM losses, (which the firm reversed recently), yoy 1H 2010 earnings grew 16% or so
• Firm still has the massive M2B loan, strong financials, dominant operating position and a management with an eye for cheap stocks

Looking to add more whenever possible

If the management should happen to read this, I will be happy to drop by your office for a chat


Disclaimer: Author owns shares in AEI Corp

AEI Corp, Singapore, owner's earnings, value stock, cheap