Novo Group Background
Novo Group is a Global steel trader that supplies raw materials and steel products to steel mills and end users on long term and consistent basis. We play an active and important role in the supplies of raw materials to the end users by directly sourcing in bulk quantities from major steel mills in the world. We are re-allocating the resources in steel industry from countries with overall cost competitiveness to end users in different key markets who are in need of the relevant resources.
As of 2H FY2010, Novo Group has expanded into the coal industry.
Steel Industry Background
Steel is Iron that is mixed with traces of Carbon, and there are two major families of steel: alloy steels and non-alloy steels. Alloy refers to chemical elements other than carbon added to the iron in accordance with a minimum variable content for each.
Steel is used in the construction of roads, railways, infrastructure and buildings. Besides that, it is used in the manufacturing of household appliances and to a lesser degree, in the manufacturing of cars.
Steel has seen a high demand from China and India, mainly due to the building of infrastructure as they seek to develop at a rapid pace. Despite steel being affected like other commodities during the financial crisis of 2008, prices have increased since the March 09 lows, and are poised to head further north in 2010.
Coal Industry Background
Coal is used mainly as a source of fuel. However, other uses of coal include the smelting of iron ore, and also in the production of gasoline and diesel.
Even with the advent of clean, renewable energy, (and I still think that there is a lot of opportunity in the renewable energy sector), coal still serves as an important commodity to generate electricity. The higher cost of switching to cleaner forms of energy, which would most probably be passed onto consumers, is a main resistance for the change to clean energy. The transport of such commodities over long distances was one of the factors that Warren Buffett bought Burlington Northern.
Novo Group
As of the end of FY2009 YE Apr, Novo Group was a steel trader, serving as a middleman between the end users and the manufacturers. This results in lower margins for the company. Currrently, Novo has intentions to develop a steel processing plant in Tianjin, and has entered the coal industry.
As of FY2009, Net Profit fell 87% YoY, and Operating Profit fell 71% YoY. Although Revenues increased 9% YoY, cost of sales was 91%, up from 86% YoY. This resulted in a lower gross margin, translating in the fall in net profit. Other Operating Expenses was USD1.9million, mainly due to foreign exchange losses. EPS for the year was USD0.0025/share, pricing it at 29x earnings.
As of 1H FY2010, Revenue was down 37.3%, to USD217million. However, cost of sales was 85% of sales, down from 91% of 1H FY2009. Net Profit increased 2688% for 1H2010.Furthermore, for 1H2010, other operating expenses dropped to 60k from 1,850k, due to no foreign exchange losses recorded. Even if foreign exchange losses were taken out the equation, net profit would still be up 193% due to the higher financing costs in 1H2009.
At the end of 1H2010, the company is in a net cash position of 1.54million, and a leverage of 0.50. Novo has a net asset per share of USD0.07, and an ROE of 14%. P/B ratio was valued at 0.12. Borrowings from the bank was a total of USD983k, all of which are secured and due within the financial year.
Comparison to Noble Group
As compared to Noble's FY2008 YE Dec, Cost of Sales was valued at 96% of sales, and profit margin was at 2% of sales. Noble was trading at 8x earnings, with a P/B ratio of 5.37.
Advantages
1) Novo's Tianjin plant allows it to be involved downstream by processing steel. By increasing its involvment in the supply chain, it allows Novo to obtain higher margins.
2) Novo has a Joint Venture with Oscar Maritime via Eastern Bulk Pte Ltd. This allows Novo control over shipping, and bring down shipping costs.
3) Novo has entered the coal trading business, and this utilises the same delivery system as steel. This would result in economies of scale, which may increase profit margins
4) For a company dealing with supply chain, it has low leverage. Furthermore, it has a 339.4 credit facility, of which 48.4million was utilized.
Disadvantages
1) Novo has a short history, it being established in 2005.
2) Novo does not own mines, therefore it is still dependent on its suppliers for raw materials.
3) Novo is vulnerable to fluctuations in steel and coal prices. A decrease in these prices will hurt the bottom line, as seen from 1Q2010.
4) Steel tends to be a cyclical industry
Conclusion
Novo is still a small company. However with increased earnings still to come due to forecasted higher margins, as well as it being undervalued to other competitors, there is still upside for Novo.
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