UMS, an alternative to lignite coal.
Unique Mining Services PLc. (UMS 10.5)
UMS 10.50 listed on the MAI with 70 mill. shares outstanding. It launched its IPO on July 6-8, 2004 at a price of 7.95. Return on equity (ROE) has been averaging at an impressive 38-40% for the past couple of years. Book value is 6.24, UMS is so trading at its lowest P/Book value since starting trading on the MAI. UMS IPO proceeds were used mainly for purchase of land for inventory jety/pier (see below), warehouses and purchases of trucks
I expect the dividend yield on UMS to be near 10% for year 2006, or so having one of the highest yields of any listed company to my knowledge (Tluxe being one exception, there may be others, but not many). Last year the dividend was 1 Baht per share, and UMS managing director MR. CHAIWAT CRUECHA-EM told me the dividend "might even be increased?" and the company was considering paying dividends out, twice a year.
Two key macro things which got my attention is that UMS seems to have ample earning growth momentum ahead of itself and is one of the only company that I know which is directly benefiting from the high global Oil prices, just now again at world record levels.
The other key thing is that Thailand is running out of lignite coal in 2007 and so UMS should much benefit.
Here is how UMS describes its business:
UMS supplies "superior quality coal with high calorific value and creates low environmental impacts", to increasing more middle and smaller sized industries around the BKK larger area. The factories, industries (like mostly paper mills, feed mills, food, garment, bleaching, cement)have already or are converting to using coal, instead of oil, as their raw material source to electricity and/or steam production. You can see their web site at this link: www.uniquecoal.com when I visited it was much under contstruction.
Coal remains much and increasingly cheaper then oil, is available from nearby (Indonesia) and since it"s a high quality coal can be used for power generation with equal or no more pollution then volatile oil. The company claims that some factories converting to coal from oil, amortized this coast within 6 months. The pay-back period from oil usage to coal is very rapid in most instances. Coal is 3-4 times cheaper then oil, for electricity generating, so said the MD of UMS in my recent visit.
Here are the impressive expansion plans for UM which will help fuel growth:
"There is a new river jetty (pier) coming on stream. 66 Rai of land stocking 200,000 tons, should be finished by Jan "07. This jetty is at a very good location with great logistics and so can increase the overall efficiency along with lower cost. It"s a great way to ship coal to our inventory areas without using trucks." So says MR. CHAIWAT CRUECHA-EM, MD of UMS.
From UMS’s financial statement:
"In the year 2005, the Company purchased a piece of land where locates at Suansom District, Baanpaew, Samutsakorn for the specific use of coal"s site which consisted of warehouse, port and office building. The land consisted of 5 title deeds, 65-3-81 Rai in area. The cost of land including developing land surface charge are amount of Baht 86.10 million. The land is not pledged for any liabilities delegation."
"A couple of years ago the company had some 20 customers, now 120…the business is growing very fast as many Thai smaller and mid sized companies are converting to coal based energy source. Using coal as compared to oil for producing electricity is 3- 4 times cheaper… Our major customers are small to- medium sized industrial plants in various types of industries. With a well-diversified customer base, we have a relatively low-risk business. This means the firm"s sales growth will not be bogged down when any particular industry has sluggish growth. MR. CHAIWAT CRUECHA-EM. UMS., MD.
With its current market share of over 90%, UMS stands at the forefront of Thailand"s small and medium industrial coal market. The company expects to see an annual growth rate of not less than 30% this year. This is expected to be achieved by the new warehouses that will expand the firm"s storage capacity. Also, the newly purchased trucks will help reduce transportation cost. Mr. Cruecha-em said in mid-year 2004.
As always advocated, read the full disclosure in the SET company profile under UMS. http://www.set.or.th/set/companyinfo.do
"UMS has engaged in importing superior quality coal with high calorific value and creates low environmental impacts. The company has imported coal from Indonesia for distribution to several domestic industries, especially, manufacturers in Bangkok and its vicinity and nearly provinces. Its main target industries including food, paper and textile industries. UMS has been successfully implementing its marketing strategies to penetrate
into small and medium scale manufacturer, and create more value added to its product, by improving its quality to match each type of boilers. Besides, UMS has also supplied coal to bidding-project customers which normally are large-scale manufacturers in cement and power industry." From UMS.
New Warehouse Projects:
The company is on the process of constructing a new warehouse in Samutsakorn province which required around Baht 90 million of capital investment. The new warehouse will be closed-warehouse with capacity to store coals around 3 times more than the existing one. This warehouse will be built closed to a pier which allowing the company to save cost of transportation from the pier to warehouse. This project is expected to be complete around October 2004.
Long Term Project
1. The company plans to build its own pier (jetty) connected to its warehouse. Such project would allow the company to save cost such as weighting fee, pier admission fee, and etc. This is a long term project which expected to be implemented between 2006-2008
2. The company plans to build a new factory to produce bricked coal to serve the target industries that use heat to produce steam such as hotel and hospital. This project will be implemented between 2006-2008.
Here are some excerpts of general interest:
Effect of exchange rate to cost of good sold "As the company imports coals from Indonesia and distributes it to the domestic industries, around 88 % of its cost of goods sold is denominated in USD currency while its revenue is in Thai Baht currency. Thus; the company has foreign exchange risk. Specifically, when Thai Baht depreciated, its cost of imported raw material will be higher. However, in order to mitigate this risk, the company bought forward contract covering 90% of total import goods. Moreover, the Company could increase the selling price and maintain its gross margin and customers at the same time since coal is still a lower cost energy compared to others".
Yet, this year the Baht vs US$ has increased some 8-9% so if anything currency movements should help UMS.
Management told me they expect the earnings per share this year to be about the same as last year, however next year should see an impressive upturn. One key reason is that Thailand is running out of lignite (an inferior to coal, coal) and so more and more clients will have to use Indonesian imported coal, a superior coal as it has low sulfur content of only 1% and 5% ash. (As compared to Thai lignite which as 2-5% sulfur.)This compares well with oil burning alternatives. Every customer gets checked on pollution and here the MD was adamant saying that their coal is at least equal or even less polluting then oil. Thai law stipulates that the maximum pollution is 1000 P.P.M., and its coal is rated at 400 to 600, or well under the maximum allowed. UMS never imports coal which has more then 1% sulfur. (I think he also said that Bunker oil has a 2% sulfur content). Government laboratories regularly check on this.
While Gas is an alternative in some cases it is out of most users covered area and is not cheaper.
As you can see, as I was convinced at some length, that ample Indonesian coal is the clear & desirable alternative in the latest energy crisis affecting so many smaller and mid sized companies/factories here.
There is competition (notably Banpu and Lanna) but these large companies only supply large users/big customers. UMS is the pioneer and leader supplying the many smaller users, with its some 265 employees.
When I asked the MD about the shortfall of earnings in the 1 Quarter, he indicated it has to do with the inventory price of its coal, as in the 1 Q "06 the coal was replenished with more expensive new inventory. I must confess, this is a mystery to me. As one can readily check UMS’s sales dropped off, not cost of sales, which did not increase in proportion. Checking on a recent Kim End report the analyst stated "we believe the delay in the changing of a boiler by a customer caused the delay". The gross profit margin remains around 31%, as in the same quarter of last year, but a touch less then 34% in 4Q of 2005. Why talk about coal inventory when sales dropped off. I am sorry to report but I was not able to dwell on this, just then. However I did send a follow up e-mail thanking for the visit and asking again clarification, no answer received to date. I will let members know as soon as I receive an answer on this point.
I think due to the above confusing point, in UMS’s, case it might well be wise to await the 2 Q results, with an eye on sales or revenue rising; as the way I was informed in my visit, this should be improving, not dropping off again. Again the MD gave me guidance on the company earnings believing UMS can earn some 2.25 to 2.35 this year and probably +20% in 2007, as business is and remains brisk. He also clearly stated the dividend might even be raised, and/or paid out twice a year.
If I take this as a good & realistic guidance, the p/e of UMS is currently a cheap 4.5 for year 2006 and dropping to 3.80 next year. On the current price this stock is expected to yield 9.5% this year and as hinted, more next year.
While Khun Chaiwat’s English was not as good as some other visits I had, I understood him clearly and made sure I was not mis-informed on the key points. I took good notes and Khun Chaiwat made some notes on my paper. He stressed the point twice that Thailand is running out of lignite coal -and that his company would surely benefit greatly from that, as so many more customers are converting to using coal vs. oil for power, electric and steam generation. This then is the reason why UMS has been eager to increase its coal inventory and inventory room to stock this which is about to more then double in capacity/size with this new pier/jetty. Why would UMS come on stream with this if they felt sales would drop next year?
Also, when I asked him if UMS sold boilers to their clients for conversions to coal, he answer a firm no, as its not in their interest to compete with the boiler making companies. We supply the coal, he said, not the boilers.
UMS has low debt a very low p/e and high dividend yield and a leader in what it does. I must and chose to go by what the company tells me, and so remain viewing UMS as a strong buy, at current levels.
Best Regards and Always Diversify your Stock Holdings:
Paul A. Renaud.
www.thaistocks.com
PS.
Here is my e-mail to UMS, I will post the answer, if any, in the comment box of this article the moment I receive this.
Dear Khun Chaiwat,
Good morning. This is Paul Renaud, from Thaistocks.com.
We had a nice meeting together in late June at your offices, which I much enjoyed and valued. Thank you again. One important follow-up question I have is as follows:
UMS sales dropped some 21% in the 1Q "06, this as compared to the same quarter last year. Why was this? You explained, as I understood it, the price of coal was higher then (old inventory), but I see the cost of sales also dropped by a similar % amount? It is sales which dropped which so affected net profit, not other expenses (or inventory) which increased.
Income taxes for example dropped by nearly 7 mill. Baht. But Selling and Administrative expenses increased some 20% by about 7 mill Baht. Again, why did sales drop off so much in the 1 Q? This is what remains mis-understood in the market now, I think. Thank you for any clarification you can share with us on this.
Very Best Regards,
Paul Renaud.
www.thaistocks.com
