UNISTEEL

Step #1: Strong consistent sales & earnings growth that looks predictable into the future...
Unisteel has demonstrated consistent growth over the years, growing at an compounded average annual growth rate of 36.7% for profit after tax and 29.8% in growth in sales for the 6 years period from 2000 – 2005.










Unisteel latest quarter has revenue hitting $54.8m, growing 43.6% on a year-on-year basis. The net profit also grew 53.9% to $11.0m.

Step #2: Conservative Financing with total debt less than a single year's net earnings...
For FY 2005, the total liability stands at $5.19m ($3.707m + $1.487m). The net profit of $48.0m far exceeds the debt incurred by Unisteel. Cash and Bank balances plus fixed deposits stands at $44.3m as at 31 Dec 2005, approximately one-year’s earnings in cold hard cash.

Step #3: Consistently high ROE, above 15% each year...
Unisteel has achieved consistently high ROE for the past 5 years successively, and has been bettering its ability at improving the ROE.

FY 2005 ROE of 36.0% (47,425 / 130,427)
FY 2004 ROE of 21.8% (18653 / 85,562)
FY 2003 ROE of 35.9% (28,671 / 79,757)
FY 2002 ROE of 28.0% (18.1m/ $64.7m)
FY 2001 ROE of 19.0%


Step #4: Intelligent Capital Allocation, where retained earnings are used for growth not maintenance...

Unisteel expenditure in investments rose 3-fold from $8.02m in 2004 ($7.89m in 2003) to $24.3m in 2005, bulk of which are used for their expansion in China in Shanghai and Suzhou.

Step #5: The Business is easy to understand, and Management is open, honest and competent...
Unisteel provides fastening solutions to the HDD industry (the little screws that hold your HDD together as well as the non-HDD business (metal and plastic components and modules that are used in higher end consumer products such as cell phones).

The group has 3 main strategic units, namely :
(1) Fastening Systems / Engineered Components. Providing the screws, modules and components for the HDD and consumer electronic products.
(2) Surface Treatment. Providing for the polishing and cleaning for the electronic parts in the consumer devices.
(3) Unisource. Providing a one-stop centre for sourcing solutions that Unisteel cannot provide for customers.

Management has been open and honest, they have received numerous awards with regards to corporate governance and transparency. The latest being the “Grand Prix for Best Overall Investor Relations” by the international Investor Relations (IR) magazine and the “SIAS Investors’ Choice Most Transparent Award – Runner-up” for the technology and electronics category.

Step #6: 2x5y= Business/Industry Prospects indicate Earnings could Double in 5 years...
SEAGATE TOOK OVER MAXTOR LEAPING AS WORLD BIGGEST HDD PRODUCER, WITH UNISTEEL AS MAJOR SUPPLIER

Research firm TrendFocus projected in March 2006 forecast the shipment of HDD units to grow from 380 million in 2005 to 445 million in 2006 (17% growth) and to 750 million (97% growth). HDD are now featured in everything, including digital home devices, music players, TVs, game consoles, cameras and more…;

Research firm Strategy Analytics in its March 2006 report expects that 943 million cellular phones to be shipped in 2006, representing about 15% growth from 2005’s record of 810 million and projected that 1 billion will be shipped in 2007, an 11% increase from 2006.

Both trends and industry prospects point towards a cheery growth for Unisteel with its core Fastening Systems / Engineered Components business unit catering to both of these 2 growth trends.

A notable point is that with the recent takeover of Maxtor by Seagate, Seagate has now leapfrogged to the world’s largest HDD manufacturer. For Unisteel who services both of these manufacturers, this is certainly a good piece of news.

Step #7: Sustainable Competitive Advantages are in place...
With the HDD industry consolidation with Seagate taking on as the market leader, Unisteel is expected to be able to maintain its position as one of the world’s leading provider of fastening solutions.

It has strategic partnerships with multiple licensors of internationally renowned patented products such as TORX®, TORXPLUS®, CAMTRONIC®, etc. and has a collaborative relationship with her larger US competitor Textron.

Unisteel’s focus on building customer relations such as creating Unisource which provides customers a one stop centre for sourcing solutions that they cannot provide. In addition, it is expanding into China to provide for one stop manufacturing services for customers who have relocated to China as the manufacturing base.

Step #8: Attractive Valuation...

Based on a growth rate of 15% and zero terminal value for 10 years, the estimated discounted cash flow from the business is $1.85. At the current price of $1.79, the value of the business is fully valued in its price. If the basis is 25% growth rate, the DCF would be estimated to be $3.22 and the current price represents a 45% discount from the DCF value of the business. Based on the growth rate of the HDD industry and consistent performance of the business, it is reasonable to apply a 25% growth rate

Decision: The business is good and fundamentally sound, with lots of growth potential. Management manages the business in a transparent fashion. At $1.60, the stock will provide a net safety margin of 50%.
Trigger to buy: BUY if price hits $1.60.
This is not an inducement to buy