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STP & I Summary

Core Content

STP & I (STPI) is a Thai steel structure fabrication company that operates in three business segments: steel fabrication, engineering services, and construction. The company specializes in providing steel structures for heavy industries such as power plants, refineries, bridges, elevated highways, and airports. STPI is known for its unconventional business strategy, which involves deliberately running down capacity utilization to wait for high-margin projects rather than pursuing low-margin, continuous work.

Main Points

• Unconventional Strategy: STPI's Managing Director, Masthawin Charnvirakul, emphasizes the importance of choosing high-margin projects over filling capacity continuously. This approach, though counterintuitive, has been profitable in the long run.
• High Revenue Volatility: Investors may initially be deterred by the volatility in STPI's revenue stream, but this is a strategic choice. By maintaining low utilization, the company avoids missing out on high-margin opportunities.
• Strong Balance Sheet: STPI has a substantial cash reserve, which allows it to weather periods of low revenue and invest in high-margin projects when they arise. This financial strength is a key enabler of its strategy.
• Growth Prospects: The company is currently working on the Ichthys LNG project, which constitutes over 90% of its backlog. This project is expected to deliver significant returns and is a major growth driver.
• Market Position: STPI's long-term net margin and ROE have outperformed the average of all Thai companies over the past ten years, five years, and nine months of 2012, indicating strong performance despite its unconventional approach.
• Valuation: The stock is currently trading at a forward PE of 15x, which is considered reasonable given its growth prospects. Comparing it to its past PE is not appropriate due to historical illiquidity and low profitability.

Key Information

• Ichthys Project: A major LNG project operated by INPEX in a joint venture with Total, Tokyo Gas, Osaka Gas, Chubu Electric, and Toho Gas. It is expected to produce 8.4 million tonnes of LNG annually and 1.6 million tonnes of LPG, along with 100,000 barrels of condensate per day.
• Company Transformation: Masthawin took over STPI in 2002 from his brother, Anutin, and turned the company around from bankruptcy to a position where it could choose its own customers.
• Management Philosophy: The company's management believes in a long-term, opportunistic approach. They prioritize quality and high-margin projects over short-term volume, which requires patience and a strong balance sheet.
• Cash Reserves: STPI has over Bt4bn (US$130m) in cash, which is crucial for executing its strategy and surviving downturns.
• Strategic Cooperation: The company formed a strategic partnership with an Australian firm, which helped build its engineering expertise and credibility, leading to contracts with world-class customers.

Figures & Data

• Figure 1: Highlights the unconventional strategy of choosing high-margin projects.
• Figure 2: Masthawin's four mountains, with the third representing the ability to choose customers.
• Figure 3 & 4: Revenue breakdown showing the dominance of process modules and structural steel/pipe fabrication.
• Figure 5: STPI's backlog is mostly filled by the Ichthys project.
• Figure 6 & 7: Overview of natural gas derivatives and their composition.
• Figure 8 & 9: Natural gas and LNG are growing rapidly, with LNG expected to grow more than twice as fast as global natural gas production.
• Figure 10: Shows STPI's low revenue stream before 2009.
• Figure 11 & 12: STPI's net margin and ROE outperform the Thai market average.
• Figure 13: STPI has a significantly higher cash reserve compared to other Asian companies.
• Figure 14: STPI's trading volume increased significantly after 2009.
• Figure 15 & 16: STPI's valuation is reasonable based on forward PE and PEG.
• Figure 17: STPI is considered very attractive based on its PEG ratio.

Conclusion

STPI's strategy of focusing on high-margin projects and maintaining a strong balance sheet has led to superior long-term performance. While its revenue stream is volatile, this is a deliberate choice to avoid missing out on valuable opportunities. The company's growth prospects, particularly with the Ichthys project, and its current valuation make it an attractive investment opportunity.