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Tuomo Saarnio
Tuomo Saarnio
Articles (23)  | Author's Website |

Unknown Bargain LHT Holdings Is an Intriguing Company

Making wooden pallets is a humdrum industry. But as we know, many times dull businesses can be good investments

November 08, 2018 | About:

LHT Holdings Ltd. (SGX:BEI) manufactures and trades wooden pallets and timber-related products. Its operating segments are pallet/packaging, timber-related products, technical wood products and pallet rental and other services.

Established in 1977 as a sawmill in a rural Singapore village, LHT Holdings has been in the timber industry for more than 20 years, and it has since grown into one of the leading home-grown manufacturers of wooden pallets and cases for the packing of industrial products in Singapore. It is a true holding company, with eight 100%-owned subsidiaries: LHT Marketing (Singapore), LHT Ecotech Resources (Tianjin, China), Kim Hiap Lee Company (Singapore), Siri Belukar Packaging (Malaysia), LHT ECR Packaging (Vietnam), LHT Ecotech Resources Pte. (Singapore), LHT GPac Technology (Malaysia) and Lian Hup Packaging Industries (Malaysia).

Making wooden pallets may sound like a humdrum industry. But as we know, many times a dull business can be a good investment. Think of Nam Lee (SGX:G0I), a boring family-owned metal products designer and manufacturer from Singapore, which was a very profitable net-net for me some time ago.

Valuation

First, here are the hard numbers.

LHT’s revenue for the six-month period ended June 30 increased by 11.6% or S$2.31 million to S$22.27 million, compared with S$19.96 million for the same period last year.

LHT’s achievements depend largely on its core business of manufacturing and sale of pallets and packaging cases. The ability to increase market share while maintaining profit margin is key to the business.

Sales in its pallets and packaging business increased by 20.4%, or S$3.08 million, from S$15.10 million to S$18.18 million, due to higher customer orders in 2018.

The company also managed to keep its costs well under control. Administrative and other expenses and finance costs all decreased.

LHT’s annual results are not necessarily completely comparable. For example, despite the lower revenue, the company’s net profit after tax increased in 2017 due mainly to a one-time gain of S$5.61 million from the sale of a leasehold and investment property.

LHT shares are traded at S$0.71 on the Singapore Stock Exchange as of Tuesday. The stock has a price-earnings ratio of 4.7, EV-Ebit ratio of 2.7 and price-free cash flow ratio of 8.7. On the other hand, the company’s return on equity is 16.4%, net profit margin is 18.7% and dividend yield is 7%.

Asset-based LHT Holdings is also a screaming bargain. Tangible book value is S$0.95 and NCAV is 0.71. The company’s net current asset value does not provide a substantial margin of safety, but then again, LHT has been profitable long term. Therefore, it is important to ask whether the company should be traded at least at its book value level.

Business outlook

Two and a half years ago in an interview, Executive Director May Yap explained how LHT Holdings in 2013 automated the production process at the Sungei Kadut site using assembly machines and an electronic database system, which kept track of inventory and monitored output, increasing efficiency.

Since then, LHT was able to keep the same team of people but raise productivity. These changes helped push profits up every year from 2013, and more than doubled the output of company’s staff. With these changes, LHT Holdings has been able to turn the company around from losing money to growing over 10% a year over the past five years.

Everything above is positive, but overall market conditions are still challenging. And as we know, following the trade war and equity markes sell-off, the global economy is also very uncertain. All of this affects LHT Holdings, and the company still has to maintain a cautious outlook and closely monitor costs because profit margins remain under pressure.

Green company

Today and even more so in the future, it is not bad that the company is trying to be as environmentally friendly as possible. LHT’s commitment to excellence and a greener environment has been recognized with many awards and certifications.

LHT Holdings is committed to protecting the earth’s precious timber resources and reducing waste. In 1997 LHT entered into a purchase contract with a German corporation and purchased a production line at a total cost of approximately S$13.0 million in order to develop the company’s wood waste recycling capability. This plant, commissioned in March 1999, enabled LHT to convert wood waste to a new product called ‘‘Technical Wood.” The advanced technology allows products to be made with greater consistency in color and texture and with a higher density. These products undergo a strict process of treatment and drying to prevent wood cracking, mold and insect attacks.

Technical wood pallets provide numerous advantages over those made with timber. They are high density, have low moisture content, are resistant to pests and have higher consistency in the final product than timber products, as timber comes with natural inconsistencies and defects. These products are therefore ideal for furniture, building material and heavy-duty industrial usage.

LHT Holdings uses recycled waste wood instead of natural resources to manufacture wooden pallets, reducing its wastage and disposal costs. LHT also procures waste wood materials from its customers apart from third-party waste-wood suppliers, thereby solving its customers’ waste-wood disposal problems and providing yet another value-added service. In addition, it uses a biomass-fired cogeneration system to generate electricity from waste wood, thus reducing its carbon footprint by almost half.

The fact is that LHT Holdings is able to offer a locally produced, green product at a stable price and with good quality. That is how it has been able to grow the business.

LHT Holdings as an investment

First, LHT Holdings is cheap and profitable -- not a bad combination. Second, owners have skin in the game. Ex-Managing Director and co-founder Neo Koon Boo is the largest shareholder, owning almost 23%. Executive Director and co-founder Tan Kim Sing (with his family) owns just over 18%, and CEO and Chairman Yap Mui Kee owns about 12.5%.

It is possible to conclude that ownership is even too focused, meaning there could be limited stock float. And even more importantly, it would be very difficult for an activist investor or any other third party to influence the company's decisions. This is one of the most important issues for investors to think about. It is difficult to find a fast catalyst that removes the undervaluation.

LHT Holdings itself has many positive features, such as long-term profitability, growth prospects and valuable green principles. But the investor must be prepared to wait patiently for the increase in the company's stock market price. Anyway, there's not a big risk of permanent capital impairment.

Disclosure: I have no position now, but I will probably buy in the near future.

About the author:

Tuomo Saarnio
I am private value investor.
Alongside my own portfolio I’m managing my family and relatives investment accounts.

Visit Tuomo Saarnio's Website


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