Tong Herr by OSK

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Tong Herr Resources (THR) has been a manufacturer of stainless steel nuts, bolts and screws for over 20 years, with its Malaysian base in Prai, Penang. Its recent acquisition of Metech Aluminium Industries will add aluminium extrusion products to its offering and make a full-year contribution in FY11, while the manufacture of steel billets is also on the cards. We value THR at RM3.10 based on a 10x FY11 PER, on the back of its new and future income streams, recovering ASPs and strengthening external demand. Initiate coverage with a Buy recommendation. 

Veteran in the fastener business. THR is no stranger in the business of fasteners, having been manufacturing stainless steel nuts, bolts and screws for over 20 years at its plant in Prai, Penang. After expanding its production base to Thailand in 2006, THR widened the applications of its fasteners to a myriad of industries such as construction, infrastructure, automotive, marine engineering and machinery and equipment.

Adding aluminium extrusion to its portfolio. In August 2010, THR acquired a 51% interest in Metech Aluminium Industries (renamed Tong Heer Aluminium (THA)), for a cash consideration of RM35.1m from Metech Group, which manufactures aluminium extrusion products. For FY11, we can expect a full-year contribution of 25.6% (RM136.5m) from THA to the company’s topline, while its bottomline contribution to THR is estimated at RM5.2m.

Steelmaking in the pipeline. In 2009, THR entered into a JV with its current directors for a proposed JV in Fuco International (FI), a company established for the business of steel billet manufacturing in Vietnam, at a total investment of USD180m (RM631.6m), Due to the financial crisis which resulted in its delay, the official commissioning of this plant is targeted for FY12. Via this investment, THR will be making inroads into Vietnam by tapping into that country’s steel billet production deficit, which currently is being satisfied by imports.


Initiate with a BUY. We value THR at RM3.10 based on a 10x FY11 PER. Our valuation represents a steep 19.7% discount to the sector average of 12.5x for its peers Chin Well and Techfast. Our buy call is supported by THR’s improving fundamentals, namely the new aluminium extrusion business being its additional earnings driver, future earnings contribution from its billet plant in Vietnam, recovering ASPs, improving sales amid the gradual recovery in the European economy and strengthening demand in its core business of stainless steel fasteners. THR’s valuation is attractive, offering a comfortable upside cushion of 19.0% to our fair value of RM3.10.