AEI Corp

Summary
A conservatively run company with good fundamentals that is currently trading at a 67% discount to net assets

Background

AEI is principally engaged in the production of aluminium alloy extruded profiles.

The Company’s business is categorised into two broad segments, namely,
(a) Electronics and precision engineering
a. HDDs, computer printers, computer monitors
b. Precision machining and industrial automation
(b) Construction and infrastructure building.
a. Public infrastructure, building construction, interior fixtures, signages and advertising panels

AEI has grown the electronics and precision engineering segment from 66% in 2003 to a high of 85% in 2007 (in terms of product mix) as the company moved away from its traditional bread and butter construction and infrastructure building segment. This move has been in line with AEI’s strategy to move into higher yield products. The company expects customer order levels from this segment to remain healthy for the rest of 2008. The construction and infrastructure building segment on the other hand is expected to face higher levels of price competition and longer payment terms.

Financials

2004 2005 2006 2007 2008 (H1)
Revenue 44.9 58.9 73.1 68.1 32.4
Profit before Tax 5.1 8.9 6.8 5.2 2.2


The company has come through relatively unscathed to date due to its move into higher value-added products over the years. During Q2 2008, the company had installed a new extrusion line to replace an older line. As a result the company operated only three lines during the period, leading to a slight decline in YOY revenue.

Ratios based on H1 2008:

As at H1 2008, the company had no loans outstanding and is in a net positive cashflow situation.

Current Ratio = 7.3x
Acid test Ratio = 5.5x
Cash Asset Ratio = 3.4x
ROE (based on FY2007) = 7.1%

Based on its share price of $0.08 as at 6 Oct 2008, investor ROE stands at 23.25%. Based on 2008 H1 results on a simple straight line method, ROE stands at 21.25%.

Current P/E stands at 4.7X.

Dividend policy

2004 2005 2006 2007 2008 (H1)
Dividends (cents) 0.75 1.0 1.1 1.0 -

Dividend yield has been fairly consistent and at current share prices ($0.08 as at 6 Oct 08) yield 12.5%.

Discount to market

Net Assets is defined as current assets less all liabilities, and excludes fixed assets (ie plant and fixtures). As at 30 June 08, Net Assets/share (NAV) stood at 24.2 cents. This essentially means that at 8 cents, the share price discount to market is 67%. In other words, if the company was to be liquidated, the shareholders would be compensated 24.2 cents or realize an approximately 300% gain on their holdings, excluding fixed assets which also carry a further book value of 6.4 cents/share for a total value of 30.6 cents.

Other information

AEI is a cash rich and has a fairly conservative management team, as evidenced by the lcak of leveraging and the high cash retention (which dilutes EPS). Cash and cash equivalents stand at 10 cents/share.

In 2007, the company provided a convertible loan facility of $4.038M to the Hoi Po Group in HK to access the Hoi Po Group’s product design, mould making and extrusion technology and provide a lower cost platform to expand the Company’s production capacity. The facility will be restructured into a Joint-Venture agreement with the Hoi Po Group to buy over the Group’s China-based operations.

As at June/July 2008, AEI had also invested USD2.5M into M2B World Asia Pacific Pte Ltd in the form of convertible loans at a conversion rate of approximately USD 0.942/share, or at a slight premium of 1.6%. The yield on the loan stands at 5% (which compares favourably against the USD fixed deposit rate). Should the loan facility be converted into an equity stake, the yield would stand at 27.3% in terms of ROE based on M2B’s FY2007 results. The transaction is expected to have no material impact on the net assets and earnings of the firm for FY2008.