Serial System Ltd

[karlmarx]

Interesting. Which led me to wonder, why has there not been any listing of Malaysian durian farms in Singapore?

Valuations will be hot!

[karlmarx]

Distribution is a difficult business with very poor economics. On the P&L, Serial Systems (SS) appears to have done quite alright, with growth in revenue over the past 10 years from $0.5b to $1.5b. Although the company's earning power does not appear to have grown much, at least it has been profitable for every year. Given its market cap of about S$135m, its P/E ratio is about 10.5. Dividend yield is 5%. Doesn't look too expensive, plus dividend yield looks good. Will SS be a good investment?

(US$)     Revenue                Net Profit
08:        540,559                  6,028 
09:        556,525                  7,480 
10:        746,231                  22,438 
11:        770,341                  16,355 
12:        658,118                  10,334 
13:        817,051                  14,397 
14:        1,036,062               16,085    
15:        1,221,562               11,035    
16:        1,402,483               4,558    
17:        1,492,204               9,550    

Total:                                 118,260 


SS' P&L figures belies a company struggling to stay afloat. This is particularly so due to its very intensive working capital needs. Because SS takes a longer time to collect receivables from customers than to pay its suppliers, the more business SS does, the more working capital it needs. Therefore, while net profit over the past 10 years total $118m, OCF is only $51m, and FCF even lesser, as will be seen later.

(US$) OCF before changes in WC          Changes in WC            Operating Cash Flow                      

08:           12,759                                 4,057                        16,816                      
09:           14,097                                 (17,307)                    (3,210)                  
10:           25,757                                 (35,971)                    (10,214)                    
11:           24,801                                 (45,389)                    (20,588)                    
12:           17,624                                 16,707                       34,331                     
13:           21,859                                 (41,218)                    (19,359)                    
14:           29,476                                 (20,863)                     8,613                     
15:           24,668                                 11,787                       36,455                     
16:           25,310                                 (4,843)                      20,467                     
17:           30,471                                 (41,809)                    (11,338)                    

Total:       226,822                                (174,849)                  51,973 


SS has been in this difficult distribution business for a long time. And so it has sought to expand into other businesses with better returns, and hopefully with better margins and lower capital needs. This led to a total of $82m spent in Investment Cash Flow, which is $49m more than its total depreciation and amortization of $32m, over the past 10 years. The result of this expansionary spending is a negative FCF of $30m. During the same period, $48m of dividends were paid. How was this funded, if FCF was negative? Without the expansionary spending of $49m, FCF will be positive $19m, over the past 10 years; still not enough to fund the dividends. 


(US$)          FCF                        Dividends               Bank Loans           Total Liabilities to Asset Ratio

08:           13,419                       3,198                      30,371                            44.99%
09:           (13,171)                    2,449                       46,392                            53.35%
10:           (27,142)                    4,865                       79,676                            60.15%  
11:           (29,294)                    9,414                       97,849                            63.04%  
12:           24,930                      3,941                       93,492                            60.87%                
13:           (35,112)                    5,652                      138,413                           67.99%                     
14:           (2,260)                      4,289                      178,447                           71.25%                 
15:           32,624                      7,202                       202,022                          74.33%                     
16:           18,927                      4,519                       204,425                           75.66%                   
17:           (13,483)                    3,005                       239,582                          73.84% 

Total:       (30,562)                   48,534 


The increase in bank loans was not only necessary to support the capex and dividends, but also for working capital. Loans are now almost double of equity, and when measuring total liabilities to assets, SS' gearing is also very high. If SS continues its expansionary spending, it certainly will not be able to maintain dividends. Not without taking more loans.


Despite its efforts, SS has not made produced any positive result with its acquisition efforts. Its desire to list one of its subsidiary on SEHK has obvious benefits of some monetisation, but mainly, is intended to boost SS' valuation. Perhaps then, when share price is high enough, it will issue rights shares to lower its gearing. 

My personal opinion is that the poor economics of SS' business, coupled with the massive loans it has taken, makes SS a very unattractive investment, at any price.

[specuvestor]

Thanks Karl for the detailed look at the cash flow. If the receivables and inventory is realistic the company is still sustainable as long as banks support them. That’s the basis of net-net but we do have a few of these companies in the spotlight in past few years

The practical solution for the company in the long term is to grow revenue at a more boring pace that doesn’t require incremental bank loans to fund the WC and debt to asset ratio will decline naturally

[karlmarx]

Indeed. But for SS to deleverage by slowing down growth might take too long. A lot can happen during that period of time. The imminent tightening of credit is just one of them.

[cyclone]

Request for Assistance in Taiwan Investigations

Serial System Ltd. announced that Dr Derek Goh Bak Heng, Executive Chairman and Group CEO, has been requested by the Taiwan Taipei District Prosecutors Office and the Investigation Bureau, Ministry of Justice of Taiwan to personally assist in certain investigations under the Securities and Exchange Act of Taiwan.

It is unclear at this juncture what is/are the subject matter(s) of the investigations. No other person in the Company has been requested to assist in the said investigations.

The Board of Directors emphasized that the business and operations of the Company and Dr Derek Goh’s roles and responsibilities as Executive Chairman and Group CEO therein are not affected in any way by the matter and will continue as usual.

[desmondxyz]

http://infopub.sgx.com/Apps?A=COW_CorpAn...onship.pdf

TI terminated the distribution contract which contributed >50% revenue of the company... It's going to be very ugly...