Sahamit Machinery (SMIT), another leader at too low valuation.

SAHAMIT MACHINERY PUBLIC COMPANY LIMITED is a leading importer and distributor of machines, nature of operation equipments which services major manufacturing industries, including automotive and parts, electric and electronics, household ware, wooden furniture, and pulp paper. The Company’s products and services are categorized in various groups:

1. Special Steels Products
- Special Steels are used for making all kinds of mould
- Ejector pins for plastics mould and die casting
- Band sawing blades, circular saw blades and aluminum alloy

Since 1985, the Company has been the sole distributor for "Bohler International GmbH" Austria, who is one of the world’s largest and most highly regarded manufacturers. Since 1974, the Company has imported high quality electrical discharge machine from Switzerland bearing the world-renowned "Charmilles" brandname which later becomes Charmilles SA. (EDM Die Singking Machines). Kitamura from Japan, Hardinge USA, KS Mould Parts, Everising, Kinkelder, Chu Shing, Sony, Tesa, Seco, Rego-Fix, Vertex, Chevalier, Phoebus, Toyo Knife, Japan.

- The Company has also been appointed as the sole agent of "KITAMURA CO., LTD." Japan since November 2002 in distributing the High Speed CNC Milling Machine.
- Also represent "HARDINGE", U.S.A. the brand for CNC Milling and Turning Machine.

Of all the visits I had in Bangkok in late June, SMIT was the most un-eventful one, in the positive sense that SMIT strikes me as yet just another profitable leader at a too low p/e which deservingly belongs in any fully diversified Thai smaller cap value portfolio. SMIT’s shares at 1.90 (a bit lower then when I visited them) seem undervalued and so today I restate my strong buy opinion. (Note, when CITY (2.14) shares -another growth stock I much like- dropped to around 2 Baht, I expressed in our member lounge that at that oversold low price of 2, I just then would prefer CITY of SMIT). Since then however, CITY moved up in price and since then I had another good chance to review all my notes on SMIT, so re-stated my very postive view today.

The company is located not far at all from Silom road, on Rama 3 Road Soi 53, and surprisingly it only took 15 minutes to get there. On the way over my driver got a traffic ticket for not obeying traffic lanes -and I thought this was rather strict. On the other hand I am happy to see that the "city of Angels" is becoming more driving rigorous then in the past and it so seems easier to get around. I offered the driver to pay for the ticket but he refused, saying something like its "my doing my traffic ticket".

Management of SMIT seems very poised and confident it conservatively keeps talking about 10% growth (the only projection I got), but I think they will do better. As in the past I strongly recommend you visit the SET page and review their prospectus in English, as all the details are given there. http://www.set.or.th/set/companyinfo.do (Enter the stock symbol). SMIT’s web site can be visited at www.sahamit.co.th

SAHAMIT MACHINERY PUBLIC COMPANY LIMITED (SMIT) was listed on May 18, 2005, at 2.75 Baht per share. (530 mill shares at par 1, no warrants outstanding). Globex was their financial advisor. The company has some 30 engineers, 310 workers and 100 office workers. SMIT is 33 years old and so an established & leading firm in what it does!

The company indicated to me that they have not yet seen any slowdown in its business/customers this year but sense it might be happening? A new "most modern" plant is coming on stream in the next few months but the conservative MD would not predict what increase in capacity this will add, as he said "it will be gradual". SMIT provides an impressive "One-Stop-Service" for the mould and tooling Industry. The company started this Project in 2005 with Baht 130 million investment in land, building, machine and tools. (One Stop Service is an innovative way in providing top quality service).

The MD expressed with some pride how their D/E ratio is a low 0.45. "Sorry, as today I am a bit jet lagged from a trip to Slovania, where we are exporting circuit breakers to".

What impressed me about SMIT is that they are clearly at the forefront of selling, installing & servicing machines which make all kinds of moulds for producing all kinds of parts, for the World. Hence SMIT (like Ticon) is a direct beneficiary of the global outsourcing trend! I call it a pure play on outsourcing. Global outsourcing may be the current buzz word, and while it may be a bit overhyped recently, its way under hyped in the long run. I firmly predict that global outsourcing will continue & expand at a rapid pace over the next 3-5 years -and SMIT will benefit from this, as long as Thailand gets its" share, which it clearly is.

As SMIT states: The company is a distributor of high demand special steel for mould making and tools and paper which were 49.94% and 11.90% of total income in 2004

Since SMIT imports many expensive machines from among other places Austria, Japan, USA and Switzerland, a firming Thai Baht currency should be if anything beneficiary.

The company’s net profit has increased impressively over the past 5 years from some 60 mill Baht to expected around 200 mill Baht this year. In year 2005, net profit was 155 mill. Baht. And for the Q1, the net reported profit was 49.7 mill Baht. I think SMIT can earn around 0.38 to 0.40 Baht per share in 2006 and as so this year’s p/e is a low 4.75, with the stock price currently at 1.90. The just past year cash dividend was 0.12, or for a trailing yield of 6.3%.

Here we have it again, ah the beauty of my select Thai smaller caps:
1) Yet another leading company in a field which is clearly growing and which Thailand is globally competitive in.
2) A decent dividend rate, expected to be 50% more then the SET average company. Along with un-leveraged balance sheet as the company has very low debt.
3) Expansion plans firmly established with a new factory coming on stream leading to support the conclusion that next year can see at least 10% + (or more) growth.
4) The book value is stated at 2005 year-end at 2.16 Baht, hence SMIT shares are trading below its book value. In the most recent quarter (1Q "06) both margins and ROE have increased. Latest ROE is stated at 16.7%. High growth with expansion plans in place, along with low financial leverage.

As you can see, the past 5 years has seen allot more growth then the "annual 10% growth" rate management likes to speaks of. And during this high growth time, interest expense on the income statement dropped from around 17.8 mill to 14 mill. Baht. Of course the company went public last year and this injected allot of new equity capital. Yet, high growth and factory expansions" use capital. So many of the high growth companies in the US for example, have high financial leverage which increases risk.

Management and insiders own allot of the shares (adding it up I would guess some 40%), distributed among various family members including Ms. Prangtip Sivaruk, SMIT’s Wood Division Manager, a USA top educated lady (I would guess around age 30) which is very knowledgeable, speaks perfect English and easy to contact if we have any further questions. I sense this is an excellent contact person in the company.

"We are a leading fullservice importer and distributor of special steel, machine tools, tooling and industrial machines, and have been serving Thailand?s major industrial sectors, such as the automotive and parts industry, electronics and electrical appliance industry, household product industry, as well as construction material industry, which includes nuts, screws, and bolts. In the automotive and parts industry, 49% of the operators are our clients, for instance, Thai Summit Group, IT forging. Co.,Ltd, Formula Automobile Co.,Ltd., and Sri Thai Group. We have implemented strategies to add value to our products, for example, providing cutting, milling, grinding and drilling special steel for making moulds with modern machines; or cutting and resurfacing paper according to our clients? needs, thus creating, synergy?s in the company?s businesses and increasing revenue. Our strategies have helped to enhance our services, and will help future revenue growth. In 2004, Sahamit earned total revenue of 1,416.08 million, and net profit of 126.33 million Baht, up 190% from a year earlier,? Mr. Chaisilp, SMIT’s President concluded". March 22 "05.

Always diversify your stock holdings,

Best Regards,

Paul A. Renaud.
www.thaistocks.com