Adampak

[dydx]

Q2/1H-FY11 results just out.....
http://info.sgx.com/webcoranncatth.nsf/V...900306556/$file/AdampakResultsQ22011_11082011.pdf?openelement [Results announcement]
http://info.sgx.com/webcoranncatth.nsf/V...900306556/$file/AdampakPressRelease_11082011.pdf?openelement [Press release]

I just wish to highlight 2 points -
(1) Q2's revenue at USD15.51m has recovered to Q2-FY10's level; when compared with Q1-FY11's USD14.467m, it is up USD1.043m, or a healthy 7.2%, sequentially. I think it is important to note that Q2's PBT at USD2.53m is up USD0.603m, or a solid 31%, over Q1's USD1.93m. This really shows that Adampak's efficient operation has a remarkable operating leverage - a USD1.043m increase in revenue in a quarter will bring about USD0.603m in extra PBT!

(2) As before, Adampak's 30Jun11 B/S has remained rock-solid. Adampak is one of the very few companies I know which has built up enough reserves over the years to 100% self-finance its own rather large and generous customers' trade receivables portfolio (30Jun11: USD14.017m), and still maintains a consistent, large net cash reserve (30Jun11: USD12.997m) for payment of generous twice-a-year dividends and for new business opportunities which may come its way. In 1H-FY11, Adampak generated a FCF (before changes in working capital items) of USD5.602m, and spent only USD0.28m in capex. The cash generated has raised Adampak's 30Jun11 cash balance to USD13.021m - equivalent to approx. $0.06/share - which is after paying out $5.273m (approx. USD4.4m) on the $0.02/share FY10 Final dividend in May11.

As expected, Adampak has declared a $0.01/share Interim dividend (FY10: $0.01/share), which will be paid on 23Sep11.....
http://info.sgx.com/webcorannc.nsf/Annou...endocument

Adampak is indeed a gem!

[kazukirai]

Looking through Adampak's Q2 results, I'd say that operationally, the management's been doing a fantastic job.

Apart from what Dydx has already mentioned, I like to highlight the following:

Distribution and selling expenses were up 10.7% (US$0.10 million) mainly due to the depreciation of the US$ against the Group’s other operating currencies and salary adjustments. This was moderated by lower performance related incentives.

Administrative expenses was 4.0% (US$0.05 million) lower mainly due to lower employee costs; the impact of salary adjustments and the depreciation of the US dollars were more than offset by lower performance related incentives and the write-back of excess provision for other employee related costs.

The USD/SGD is impacting their bottom line in a real way. And since most of their sales (87%) goes to the electronic sector, it's inevitable that Adampak will be impacted by a general economic slowdown.

That's the business.

As a stock, (using very, very conservative estimates) Adampak is priced for -7% growth p.a for the next 10 years.

So the question is, do you think Mr Market is rational or irrational now?

[mrEngineer]

Hi Kazukirai,

Can you elaborate more on how did you managed to arrive at -7% growth pa for next 10 years? You have used the FCF to project for 10 years and discount it to current stock price?

[Some-one]

One thing I would like to highlight for AdamPak is that the current assets actually exceeded the total liabilities. Note that it exceeds the total liabilities and not current liabilities. In Ben Graham terms, it is actually the net net and I think that is great for a small company.

[dydx]

Following the Q2 results released on 11Aug11, Lim & Tan has issued a one-page update report (in p3) dated 12Aug11 on Adampak and is calling a 'BUY' on the counter.....
http://www.remisiers.org/cms_images/rese...082011.pdf

[kazukirai]

Hi Kazukirai,

Can you elaborate more on how did you managed to arrive at -7% growth pa for next 10 years? You have used the FCF to project for 10 years and discount it to current stock price?

Hi mrEngineer,

Yes, that's essentially what I did.

First, Project FCFF for 10 years, discount back to present, sum PV of FCFs, add to equity, divide by shares outstanding to get a Fair Value.

Then, use excel 'Goal Seek' function to calculate the growth rate by setting the calculated value to current price.

The assumptions I use are pretty conservative I think:
- Avg FCFF over 10 years.
- 15% discount rate discounting FCF to PV.
- Zero Terminal Value

I picked up this idea from reading James Montier but he doesn't explicitly bring one through a working model. Plus I recall he uses a more complicated ver, 3 stage model I believe, which given my limited knowledge of the markets and stocks, I prefer to keep things simple.

Also, I believe this won't work too well with companies that have lumpy cashflow. Potentially, I think that will end up like the 6ft man who drowned crossing a river that was on average 5 ft deep.

Appreciate all comments.

[Some-one]

Hi Kazukirai,

Can you elaborate more on how did you managed to arrive at -7% growth pa for next 10 years? You have used the FCF to project for 10 years and discount it to current stock price?

Hi mrEngineer,

Yes, that's essentially what I did.

First, Project FCFF for 10 years, discount back to present, sum PV of FCFs, add to equity, divide by shares outstanding to get a Fair Value.

Then, use excel 'Goal Seek' function to calculate the growth rate by setting the calculated value to current price.

The assumptions I use are pretty conservative I think:
- Avg FCFF over 10 years.
- 15% discount rate discounting FCF to PV.
- Zero Terminal Value

I picked up this idea from reading James Montier but he doesn't explicitly bring one through a working model. Plus I recall he uses a more complicated ver, 3 stage model I believe, which given my limited knowledge of the markets and stocks, I prefer to keep things simple.

Also, I believe this won't work too well with companies that have lumpy cashflow. Potentially, I think that will end up like the 6ft man who drowned crossing a river that was on average 5 ft deep.

Appreciate all comments.

Hi Kazukirai,

I am also using the DCF model to calculate the fair value for AdamPak and the following is what I have calculated using last 10 years of data.

FCF

Year 1 = 3.8 million
Year 2 = 4.3 million
Year 3 = 6.2 million
Year 4 = 8.4 million
Year 5 = 12.4 million
Year 6 = 10.2 million
Year 7 = 16.7 million
Year 8 = 11.7 million
Year 9 = 15 million
Year 10 = 20.4 million

Using a beta of 1.1, the CAPM discount rate would be about 10.71%. Considering that the Free Cash Flow increases from 3.8 million to 20.4 million in the last 10 years, I find it hard to believe that the growth rate is -7% per annum unless the core business of AdamPak would be shrinking in the next 10 years.

In any case, I use a discount rate of 10.71% and arrive at a fair value of 47 cents USD or 57 cents SGD.

Assuming that the discount rate is 15% as you have used, that would mean a beta of 1.7 and I arrived at a fair value of USD 0.25 or SGD 0.30 with an exchange rate of 1USD=1.22 SGD.

[kazukirai]

I find it hard to believe that the growth rate is -7% per annum unless the core business of AdamPak would be shrinking in the next 10 years.

I find it hard to believe too but that's what Mr Market is implying given current prices.

Which is why, the relevant questions (as always) is to ask oneself:

a) Is Mr Market being Rational or Irrational at this point in time?
b) Is there a adequate margin of safety given the returns I am seeking?

[freedom]

1. to project for 10 years for a small cap like Adampak and a volatile industry like electronic is not so wise. if 10 years ago, anyone had used 10-year DCF to buy Creative, today, he probably would lose substantial amount of money.

2. although Adapak may not be at its peak, it should be near to its peak at least. There seems be no much growth. a growth rate of negative would be more conservative.

just my thought only.

[csl123]

Adampak will very unlikely be a target for institutions. This counter will more likely be a dividend yield counter.