Is there money to be made in waste wood and pallets?
Pallets play an important role to lubricate the world trade, they act as cogs in the global trade machinery of retailers, distributors, transportation and logistics service providers. It forms the backbone of any supply chain. They are hidden from us, yet their usage has grown tremendously along with accelerating globalisation.
LHT Holdings (SGX:BEI), formerly known as Lian Hup Timber, is one of the largest manufacturers of high quality wooden pallets, boxes and crates in Singapore. It has over 30 years of experience with operations in Singapore, Malaysia, and China. It operates in four segments: Pallet/Packaging, Timber Related Products, Technical Wood Products, and Pallet Rental and Other Services.
The company also operates as a timber merchant, saw miller, commission agent and dealer in wood products, pallets, and packaging, as well as recycles and recovers wood waste. In addition, it manufactures, imports, and exports green products and woodchips, as well as provides logistics, industrial packaging, and heat treatment services.
Their raw materials are sourced from Malaysia and Indonesia and their clients come from Asia Pacific region including India, China, South Korea and the Philippines. Their current pallet market share is about 50% in Singapore and LHT’s eventual target is 80%.
In their daily operations, LHT produced leftover timber and it cost the company about $600,000 a year to dispose of unwanted timber. When faced with this issue, LHT innovated to turn their waste wood as raw materials for technical wood pallet through a specialised pressure technique. It effectively turned waste into a source of profits for the business.
How did they do it? Through a listing process in 1999, the company raised funds to embark on their recycling plant project and imported the technology from Germany. Its current market capitalization is S$29.6 million. The listing was proven to be more useful because it allowed them to receive more business enquiries from overseas clients as well as more visibility and credibility.
What makes technical wood pallets superior?
- Resistant to pests and fungus
- Fire-retardant and free from natural defects
- Stronger and more uniformed
- Environmentally friendly
Not wanting to be average, LHT pursued innovation to next level. It invented Innovative Process Product Conversion (IPPC) pallets, crates and boxes – a mix of technical wood and laminated veneer lumber.
LHT is managed by Managing Director (Mr Neo), Acting Managing Director (Ms Yap) and Executive Director (Mr Tan). All in all, they own 53.3% of the Company’s shares.
Ms Yap is in charge of leading the productivity efforts of the Group through radio frequency identification and efficient consumer response pallet tracking system.
In an approach that is highly supported by our Government, Ms Yap went ahead to automate the production process at their Sungei Kadut site, a size equivalent to 4.3 football fields, with assembly machines and electronic database. It boosted productivity because workers do not need to make manual calculations anymore. Instead, the technology keeps track of inventory and monitors output for them. This procedure effectively doubled the output of her staff. Furthermore, since 2005, LHT used radio-frequency identification to trace pallets, improve billing accuracy and reduce reliance on manpower.
As of 1H FY2016, we are starting to see signs of cost rationalisation. The Company’s revenue improved 1.7% yet its profit before income tax increased proportionally larger by 42.8%.
As of Last Twelve Month, LHT hit its record revenue of S$52.3 million and reported S$4.4 million. In its balance sheet, it carried $5.9 million net cash or $0.111 net cash per share. This gave LHT Holdings a valuation of P/E of 5.4x (ex-net-cash). It paid out 3 cents in dividends last year. Assuming the same dividend paid, the current yield is 5.4%. LHT’s share price appreciated by 18.1% year till date, as of 14 October 2016.
Moving forward, LHT Holdings plans to expand its wings through collaborations with foreign eco-conscious companies. However, it is important the risks ahead. For example, pallet businesses are reliant on the manufacturing sector and exposed to the prices of timber denominated in US dollar.
(source: Company Website, CapitalIQ, Straits Times, The Edge, Business Times)
*disclaimer: This article and its contents contain opinions and ideas of its author. It is not a recommendation to purchase or sell securities of any of the companies or investments herein discussed. The article is written with the understanding that its author is not engaged in rendering legal, accounting, investment or other professional services. If the participant requires expert financial or other assistance or legal advice, a Competent Professional should be consulted. The author will not guarantee the accuracy of the information contained in the article. The author has no vested interest in the above company.