Spindex Industries

[weijian]

I wonder if the squeeze in margins could be a sign of things to come for most firms stuck in the middle of the supply chain (with neither IP of your own nor owning the customer relationship at the end)

Condensed Interim Financial Statements For 6 months ended 31 December 2021

The disruptions caused by the pandemic have raised costs in a number of areas. Higher utility, environmental restrictions and transportation bottlenecks have contributed to an increase in the prices of raw materials and logistic costs.

Although revenue has risen by 10%, higher costs of sales which increased by 17% resulted in a 12.7% decline in gross profit to $21.0 million in H1 FY2022. Correspondingly, gross profit margin dropped from 24% in H1 FY2021 to 19% in H1 FY2022

https://links.sgx.com/FileOpen/SpindexIn...eID=701858

[wj1984]

I would say they do not own the end user but they do own the relationship with the brands (i.e. LG / Samsung, other white goods manufacturers etc.). I think this relationship should be good enough. Margins are being squeezed at all points of the supply chain be it from labour or transportation; raw material, middle & end.

Another big draw down from their cash pile and they took on some short term loans.

Would see next HY if Spindex increases the selling price of their products (from the rev / gross profit margin) and see if the customers are sticky (rev).

[ghchua]

Hi weijian & wj1984,

Being optimistic, I think supply chain margin squeeze might be a short term issue due to Covid-19. I believe things will get better going forward once Covid-19 issues had been resolved.

As for the loans, it is used for development of Nantong plant. Even taking the short term loan into consideration, the company is still in a net cash position. I guess they cannot sit still, and expanding their manufacturing facilities is crucial to serve its existing and new customers in the long term.

In short, yes, they are affected by Covid-19 in the short term, but their low valuation, strong balance sheet and decent dividend yield provides a base for its share price.

[wj1984]

Hi weijian & wj1984,

Being optimistic, I think supply chain margin squeeze might be a short term issue due to Covid-19. I believe things will get better going forward once Covid-19 issues had been resolved.

As for the loans, it is used for development of Nantong plant. Even taking the short term loan into consideration, the company is still in a net cash position. I guess they cannot sit still, and expanding their manufacturing facilities is crucial to serve its existing and new customers in the long term.

In short, yes, they are affected by Covid-19 in the short term, but their low valuation, strong balance sheet and decent dividend yield provides a base for its share price.

Hello GH, thanks for taking the time to reply. I enjoyed a lot of your post on this forum; the most recent ones being your succinct explanation with regards to BWL offer.

1. when the supply chain issues resolves; i believe the current demand / stockpiling will also abate and revenue might plateau or fall

2. loans for nantong plant. About 2 FY back they were net cash at about 50m (last FY they paid 15m in capex, HY22 they borrowed 15m) and slowly drawing down on this cash pile. something i hate to see but as you explained is a good thing because they are investing in the future and we should soon see if this new factory will contribute to both top & bottom line. Back to the loans i believe they are just short term loans which they would eventually payback since there could be some issues transferring large amount of monies to china.

3. some textbook exercise i did; DCF valuation based on extrapolating HY22 data. Using wacc 15.1%, terminal growth 10% (because why not!) i get a share price of 1.21

[weijian]

Spindex announced its 1H24 results recently and the drop in revenue is alarming. Of its 3 business segments, 2 of them have dropped and the only performer Machinery/Automotive had a good 1H24 mainly due to "The MA business segment achieved a growth of 7.9% aided by temporary seasonal year-end restocking of certain products".

Half yearly revenue
1H22: 108,477 (end of the covid boom)
2H22: 97,532
1H23: 94,155
2H23: 89,294
1H24: 88,191

Mgt has done a decent job in terms of COGS cost cutting (or maybe it was more of a relaxation of supply chain squeezes than anything else?). However, the covid-19 boom is well over and Spindex looks to be returning to pre-covid levels in business terms.

Spindex 1H24:
https://links.sgx.com/FileOpen/SpindexIn...eID=786055

[ghchua]

Hi weijian,

There was significant front loading during Covid-19 period, and now contributed to supply glut. I think the company also did not anticipate the market to go down so quickly, but they have taken a more conservative approach to cut dividend payout and retain more cash. Of course, I think they have managed costs quite well as some companies had gone into losses in this current environment.

All in, I think Spindex should still be profitable for the year, despite drop in revenue. Hopefully, orders will come back and we will be seeing better days for the company.

[dydx]

Spindex announced its 1H24 results recently and the drop in revenue is alarming. Of its 3 business segments, 2 of them have dropped and the only performer Machinery/Automotive had a good 1H24 mainly due to "The MA business segment achieved a growth of 7.9% aided by temporary seasonal year-end restocking of certain products".

Half yearly revenue
1H22: 108,477 (end of the covid boom)
2H22: 97,532
1H23: 94,155
2H23: 89,294
1H24: 88,191

Mgt has done a decent job in terms of COGS cost cutting (or maybe it was more of a relaxation of supply chain squeezes than anything else?). However, the covid-19 boom is well over and Spindex looks to be returning to pre-covid levels in business terms.

Spindex 1H24:
https://links.sgx.com/FileOpen/SpindexIn...eID=786055

Revenue looks like having bottomed out since 2H-FY23 (i.e. staring from Jan23). Bearing in mind selling prices could have fallen as well, actual business volume in terms of unit count could have increased in 1H-FY24, giving rise to higher efficiency, and the better margins and higher profits reported. This business is well managed.

[wj1984]

Rather good set of results (3.1% increase in rev from 2H2023 to 2H2024 and better COGS leading to 29.1% increase in GP) and with a 60m cash pile, investors will now question what would Spindex do with this monies

[ghchua]

Hi wj1984,

After the drastic cut in dividends for FY23, they are back to their "old habits" of paying around 20% to 25% of their net profits as dividends to shareholders.

As for the cash holdings, previous AGMs they had maintained a conservative approach. The need for working capital and affordability was emphasized, where the cash position is not excessive.

Let's see what are their answers for the upcoming AGM. I am sure that there will be questions around their cash holdings again.

[wj1984]

Hi wj1984,

After the drastic cut in dividends for FY23, they are back to their "old habits" of paying around 20% to 25% of their net profits as dividends to shareholders.

As for the cash holdings, previous AGMs they had maintained a conservative approach. The need for working capital and affordability was emphasized, where the cash position is not excessive.

Let's see what are their answers for the upcoming AGM. I am sure that there will be questions around their cash holdings again.

Hello ghchua,

the drastic cut back then in 2023 was because they needed funds for the new factory in china i think (they were spending about 10m annual for 2-3 years in a row) and market uncertainty.

its nice that they restore back the dividend. I have asked before at one of the agm during covid period via email with regards to their cash hoard (40m back then); whether they have any intentions with regards to the cash and their typical text book answer; m&a opportunities or expansion when there is a market demand.

But a typical informed shareholder would always want the coy to pay out excessive cash since their core business is machining and not managing cash (which i presume mainly in short term deposits). Holding too much cash affects ROE.

Hopefully (wishfully) the founding family with 75 percent stake (115m outstanding shares x 0.75 = 87 m shares) would take the coy private ($40m / (115m - 87m) = $1.42 per share) and leaving them still with 20m in the coffers!