Spindex Industries

[Kaimin]

Now that the takeover bid isn't relevant anymore, we can go back to talking about the fundamentals. Spindex has some wonderful fundamentals

PE = 9
Price/FCF = 9
P/BV = 1.3

Negligible long term debt. Management has done very well for the company since it's inception and they have the most skin in the game. But due diligence wouldn't be complete without comparing with other companies in the industry. Anyone know which companies are comparable? Are precision manufacturers flexible enough that all companies called precision engineering are comparable, or do they specialise in different parts?

[holymage]

There are quite a number of Singapore listed precision engineering companies like Spindex, UMS, Micro Mechanics, Innotek, JEP, Fu Yu, Sunningdale Tech etc. The definition could get a bit blurred if you choose to include contract manufacturers like Venture, Valuetronics and Amtek etc.

Industry plays a major part. Automobile, Consumer Discretionary, Semiconductor industry is evidently more cyclical than that of Medical or Aerospace. Even within the semiconductor industry, there are differences, depending on which segment they support.

Another difference would be the manufacturing processes that the company offers. The technical demands for machining, metal stamping, plastic injection moulding, etc are different. Even within the same manufacturing process, the technical capabilities can vary quite a fair bit. This can be seen via the higher margins enjoyed by the semiconductor precision engineering companies compared to other industries, for the same CNC machining process. The tolerance (precision) for semiconductor is much more tight than that of aerospace or oil & gas, due to miniaturization of semicon components.

Operational efficiency plays a part as well.

[BlueKelah]

Now that the takeover bid isn't relevant anymore, we can go back to talking about the fundamentals. Spindex has some wonderful fundamentals

PE           = 9
Price/FCF = 9
P/BV       = 1.3

Negligible long term debt. Management has done very well for the company since it's inception and they have the most skin in the game. But due diligence wouldn't be complete without comparing with other companies in the industry. Anyone know which companies are comparable? Are precision manufacturers flexible enough that all companies called precision engineering are comparable, or do they specialise in different parts?

Made quite a bit on this stock but I do think it has peaked out at the moment, the most maybe rally another 20-30%??? if market is hotter. Not sure if they can grow much more, especially if the auto industry starts going electric. And you will be paying a premium with no margin of safety and very poor div yield.

The other thing is it is still way too thinly traded which means any downside will be big and swift as well. 

I expect it to hit below 50c during a market correction or if the industry they are involved in goes into a downcycle.

[Kaimin]

Made quite a bit on this stock but I do think it has peaked out at the moment, the most maybe rally another 20-30%??? if market is hotter. Not sure if they can grow much more, especially if the auto industry starts going electric. And you will be paying a premium with no margin of safety and very poor div yield.

The other thing is it is still way too thinly traded which means any downside will be big and swift as well. 

I expect it to hit below 50c during a market correction or if the industry they are involved in goes into a downcycle.

Market speculation liao, this is valuebuddies. Using Graham's p/e formula of intrinsic value = 8.5 x (2 annual growth). Spindex last five years CGAR is 15%. From this formula the p/e should be 38.5 or intrinsic value $4.50 per share, which is a nice margin of safety. And the FCF is in line with net income and the accounting is nice and straightforward, unlike the rabak net income recognition so many modern companies use. So got no nasty surprises in income recognition. Virtually no debt also. Looks like a nice value stock.

Ofc there's the worry it's a long term cyclical and all its gains come from the upswing. But even if net income growth becomes zero, you'd still get a p/e of 9, which is solid even in Graham's day. I bo bian do qualitative on the business because they got no precise product breakdown. Best I can tell is they build parts for automotives and consumer electronics and printers, largely for cars and largely in China, which has a good outlook. Their geographical revenue hasn't changed much since 2008, which suggests more organic instead of geographical growth ie because China is growing. 

I really like how even in 2008 their profit when up.

[holymage]

From my observation of BlueKelah's posts (the user with the sexy girl avatar that changes at times), he is a value investor with Graham's style of cigarbutts approach. Guess he is more comfortable/apt at buying at a discount to book value than predict growth and pay for earnings, which is why the bulk of his portfolio is littered with fundamentally weaker or illiquid companies, or quality companies picked during downturn. That being said, his price estimation seems plucked out of the air.

Back to Spindex. P/E of 38.5 for Spindex just doesn't make sense intuitively... Try doing a reverse discounted cash flow using a market cap of $539 million (at P/E of 38.5 and 2017 earnings of $14 million) and let's see if you will get a reasonable growth rate.

[BlueKelah]

From my observation of BlueKelah's posts (the user with the sexy girl avatar that changes at times), he is a value investor with Graham's style of cigarbutts approach. Guess he is more comfortable/apt at buying at a discount to book value than predict growth and pay for earnings, which is why the bulk of his portfolio is littered with fundamentally weaker or illiquid companies, or quality companies picked during downturn. That being said, his price estimation seems plucked out of the air.

Back to Spindex. P/E of 38.5 for Spindex just doesn't make sense intuitively... Try doing a reverse discounted cash flow using a market cap of $539 million (at P/E of 38.5 and 2017 earnings of $14 million) and let's see if you will get a reasonable growth rate.

yep value investor hence I am hanging out at this forum for value investors, no surprises here.

However I do not purely adopt Graham's "cigarbutts style approach" but have my own set of criteria which includes management quality/opmi friendliness and other common value things like NAV/RNAV. Also macro view such as where the market is(STI index) and where the sector is are also pretty important. U can PM me if interested to learn more.

Find it pointless to predict growth/earnings, especially for micro/small cap companies as business is fluid and can boom and bust very quickly. Prefer to buy unloved small caps during an industry/sector recovery and those that provide some amount of MOS.
, 
As for saying Spindex could hit 50c. If you look at historical 10 year prices, after last GFC, Spindex was around 25c-30c range prices, I know coz I was collecting it already back then. ( Spindex was making profits, giving steady dividends and had a boatload of net cash, fundamentally rock solid. Boss was also a member of PAP Hougang GRC, so rock solid no funny business management. )

As the market sentiment got much better after QE1 and QE2 and car industry started recovering in USA, Spindex was making profits but still doing sub 35c prices until around mid 2013 when probably the earnings/dividends/yield became too juicy to ignore and the price started to slowly go up. Now both the earnings and privatisation has driven up the stock price to all times high, in fact more than 3x the price pre-2013. 

So lets say STI goes to all times decade high, 3700 or 3800 or maybe even hit 4000, then does a 30% reversal during a crash/correction, and if concurrently US side auto industry hit a snag and downturn, especially if oil price suddenly spike. Spindex may only breakeven or very small profit. 

In which case, 50c would be a conservative call. In fact, it might even go to sub 40c level again. Do note that it is very common for unloved small cap stocks to trade at 50% discount to NAV in a market downturn and last time I looked, Spindex NAV was only around 85c.

(you can go read the Penguin thread where I said during downturn it could hit 10c again, based on similar logic and during the last crash in share price, when OnG went into downturn, it went down to that level)

but please, don't let me spoil your Spindex party, as I said might have some 20-30% upside this year 2018!! ;P

[Kaimin]

From my observation of BlueKelah's posts (the user with the sexy girl avatar that changes at times), he is a value investor with Graham's style of cigarbutts approach. Guess he is more comfortable/apt at buying at a discount to book value than predict growth and pay for earnings, which is why the bulk of his portfolio is littered with fundamentally weaker or illiquid companies, or quality companies picked during downturn. That being said, his price estimation seems plucked out of the air.

Back to Spindex. P/E of 38.5 for Spindex just doesn't make sense intuitively... Try doing a reverse discounted cash flow using a market cap of $539 million (at P/E of 38.5 and 2017 earnings of $14 million) and let's see if you will get a reasonable growth rate.

It takes about 16% annual growth for 5 years which levels off to 5% to get that market cap. Even without growth, P/E or P/FCF of 9 suggest an 11% return, assuming zero growth, which is quite acceptable (for me at least).

I'm also very uncomfortable predicting growth, but all investing relies on some form of prediction. The principle of value investing is that these predictions are very conservative so there is a margin of safety. The margin of safety here is that the growth is unaccounted for (unlike many companies like Tesla or MS with huge P/E). So even if it does fail to materialize, you're left with a good EPS, almost no debt and a P/BV of ~1.2.

[ksir]

To me the biggest risk in investing in spindex is the low ball offer from the majority shareholder.
Obviously there is nothing illegal.
But, if you & some other minority shareholders own a passive 30% stake in company with your active biz partner who owns 70% and yet from the experience your partner did offer you some low ball price to acquire your stakes. Luckily to you, the offer was failed.
However, history tends to repeat itself. He just has to keep trying to increase the stakes and voila, sooner or later you are out by another low ball.
No matter how appealing the numbers are, the structure and “incentive” of the Management (from track record) is not aligned with minority shareholders.
<used to be vested>

[Kaimin]

To me the biggest risk in investing in spindex is the low ball offer from the majority shareholder.
Obviously there is nothing illegal.
But, if you & some other minority shareholders own a passive 30% stake in company with your active biz partner who owns 70% and yet from the experience your partner did offer you some low ball price to acquire your stakes. Luckily to you, the offer was failed.
However, history tends to repeat itself. He just has to keep trying to increase the stakes and voila, sooner or later you are out by another low ball.
No matter how appealing the numbers are, the structure and “incentive” of the Management (from track record) is not aligned with minority shareholders.
<used to be vested>

But takeover bids are made at a premium to the current price, usually a good one (ie 21% for spindex this Feb).

[holymage]

While I don't think that low ball privatization offer is an investment risk, perhaps it is potential waste of investment research time. This reminds me of Auric Pacific. Before privatization they are clearly on a turnaround path, yet they halt dividends due to loss made during the year, which was actually due to an impairment charge oj intangibles, by management. Free cash flow was strong at $30 million and they privatized at a price to free cash flow of around 3. Very OPMI unfriendly.

By the way, I obtained a very different growth rate from yours, using a discount rate of between 10-12%. Maybe I made an error somewhere.

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