Revisit a long favorite.
METCO (136), here is an update on a stock I would keep rating a long term buy, despite the 40% stock price increase since our last write-up.
Metco (136) is a stock I have been following for a long time. After a price surge a couple of years ago, I advocating to step back for a while. Then about a year ago, around 87- 89 Baht a share it was favorably mentioned here again and by me live on CNBC, TV.
METCO just went XD for 10 Baht a share at the end January ’03. It currently seems to be in a bit of a price corrective mood -and to me- this spells but another buying opportunity.
First, it is interesting to note that 3 broker estimates on earnings for this year range from 28.7 (ABN-AMRO), 35.1 by Seamico and 42.8 by Kim Eng. The average earnings estimate by those 3, is 35.5 earnings per share. Hence at a current market price of 136 the estimated 2003 p/e is only 3.8; making among the absolute lowest valued stock on the SET; this as evaluated on a p/e basis. But look at the price to book or free cash flow, as here too, this stock looks undervalued.
For next year the broker consensus estimates I have seen is for Metco to earn 40.38 per share or, an expected p/e of 3.4 for year 2004. The book value is shown at 190 Baht per share, up from year 2002 of 161, and expected to grow to 215 Baht per share, by the end of this year. Hence on a price to book this stock is also very undemanding and noteworthy.
The dividend was 10 Baht for last year (just went XD 2 weeks ago), and this is expected to increase to around 12 Baht for the next year. Their stated policy is to pay 30% of net profit in dividends, but in the past this was always more. (Lately this has been 36-38%). Metco usually goes XD in late January and pays the cash dividend in late February.
Remember METCO is a company which produces top of the line high demand electronic products like Car CD players (In-Dashboard CD changer for Panasonic) and Digital Cameras (for Cannon), also some sort of temperature gadgets and PCBA’s made for NEC. DVD players and digital movie cameras which are the industry’s fastest growing items, will help fuel profit growth in the second half of this year. The technology know-how and some customers, comes from Japan. Indeed, Japan is the major brain behind METCO, as Muramoto Japan owns 65% of METCO, Thailand. (Hence the free float is not that big but the major shareholder has been a steady holder of this percent for years).
Car CD players are increasingly common in even less expensive cars. CD’s are more reliable far higher sound quality and one can insert a few of them, all at one time. Hence the cassette tape is on its way out. This is a growth product and new cars have been selling fast, especially in Thailand.
Two years ago METCO changed their business model somewhat allowing profitability to grow faster and at the same time the cash flow is growing impressibely; estimated at 1.84 Billion Baht for this year. This cash flow helped reduce the outstanding debt of the firm and allows for continued high dividends into the future. For example in the 1 Q of this year, they plan to pay off a 5 million US$ loan.
The high cash flow allows them also to fund increased and expanded new production if they so want. For example now they have increased capacity for CD readers and digital cameras (Along with car CD players, Digital Cameras and DVD’s are the fastest growing consumer products in the world now). METCO always has a high chance to get new product orders from Japan due to their major shareholder in Japan. METCO expects to invest 200 to 300 million Baht every year in new/better production facilities.
The digital camera production has slowed down a bit last quarter and this, due to a minor technical glitch. But they much believe this is short lived and will catch-up by Quarter 2 and 3 of this year. If this is the reason why the stock is a bit in a price corrective mode just now, I view it a rare buying opportunity for investors. More prudent investors may want to just accumulate buy this stock, but I would rate it a long term buy as more and more institutional funds are falling "in love" with METCO. My view is they are watching this stock and will be quick to get some should there be any further weakness.
Japan is now ever more determined to cut their cost of production in the future. This bodes well for METCO as the firm in Thailand can produce these products allot cheaper then in Japan. The second and third quarter of this year will show "new vigor" as a new digital camera and a new product (we do not know what it is) will be announced and launched.
Just as I was ready to post this report, METCO reported its last quarterly earnings at 12.42 vs. 5.77 for the Quarter ending December 31 '02. I think this was on the higher end of expectations.
Best Regards,
Paul A. Renaud.
