Spindex Industries

[Musicwhiz]

Hi dydx and all,

Interesting discussions, and I must say I enjoy it, even though it's rather "academic".

Basically the formula for the raw FCF as I see it is as follows:-

Aftertax NPAT + one-off accounting adjustments +/- Exchange Differences. The argument is that capex is discretionary and that Management can choose to defer it or delay it, and that working capital changes are merely timing differences with regards to the timing of cash inflows. Valid points indeed, but I would argue that capex CAN be split into maintenance and expansionary capex simply by asking Management (I've done this before) on the recurrent capex required for maintenance of machines etc. Once you have a baseline capex level for maintenance (and this is cash paid, not profits), then you can safely subtract it from the above formula to make it more robust.

Essentially, what the OCF portion of the Cash Flow Statement is showing is the adjustments to NPAT which reconcile it back to actual cash generated, and would already included stuff like adding back accounting items (depreciation, amortization and impairments). We also have to account for other factors such as taxes/interest paid which impact cash flows.

Another point brought up is the price premium paid over "raw" FCF. Just wondering how we should think about P/FCF and what would make one choose say 1x, 2x or 4x?

Thanks.

[Drizzt]

i always thought we are talking about fcf thats why its abit puzzling when capex is not included

[D123]

Needless to say, I disagree with using an "after-tax, before capex, before WC changes 'raw' FCF multiplied by 4" (or even 5) approach to finding the fair value of Spindex.

I try not to reinvent the wheel. Warren Buffett has already outlined how he thinks owner's earnings should be calculated in his 1986 shareholders' letter. In essence, I guess this should also be the "FCF" that investors should be concerned about.

In Spindex's case, it seems almost silly not to include capex in FCF (or owner's earnings) calculations since it is a traditional brick-and-mortar manufacturing company. If you have seen its factories, you will agree that significant maintenance capex is needed on its plants and buildings on a year-to-year basis. Apart from their plants, some of their machinery parts need replacing every year. The oldest machines they have are already fully depreciated and have their worn out moving parts replaced on a regular basis. And lastly, another significant cost of operations is the need for working capital. The company needs to buy unfinished goods such as metal rods, sheets and blocks, so that they can produce their final finished goods. From what I have seen, they are unable to fund these working capital costs through trade payables, and have to maintain some cash on hand to react to ever-changing demand.

[FYI, demand for companies in Spindex's industry typically don't get locked in for more than three months. Customers may give guidance up to 6 months or a year, but these are not set in stone and will only be signed about 3 months before delivery. Hence, having some cash on hand and showing your customer that you are able to ramp up production when required helps in building the commercial relationship with them. But back to my earlier point, the three costs mentioned - for plant, for machinery and for working capital - are surely significant costs that eat away at FCF (or owner's earnings)].

Furthermore, not counting capex and working capital increases would have been a less contentious issue if they have truly been spent for growth in increasing FCF (or owner's earnings). But just look at Spindex's net profit record since 1998 when it listed. Rising revenues, yes, but at what about reported net profit? Or FCF (or owner's earnings) for that matter? Or net margins? The fact that they have spent a cumulative S$20M (roughly) more than they have depreciated since 1998, and not raise earnings significantly in a sustainable manner surely points out that not all capex was spent for growth.

Having said that, I appreciate that everyone has their own method of valuing a company. To each his own.

As for affixing a multiple to earnings as a quick calculation of value, I see it as a shorthand for DCF calculations. An appropriate multiple should be used for each company, taking into consideration its cost of capital and any alternative "risk-free" rate available. The multiple that different people use might be different, but again, what you discount matters. I'm sticking with owner's earnings that take into account capex and working capital changes. As a quick reality check, Buffett paid roughly 8 times for See's Candies (although I'm sure even he couldn't have seen the resounding success that See's turned out to be, and likely underpaid), and said at the last shareholder's meeting that he would pay 9 to 10 times earnings for businesses that have the same characteristics as the ones Berkshire owns in its non-insurance portfolio.

[changwk]

In 8 aug 2008, the founder Choo Heng thong sold his 24% stake in spindex.
It was only announced as a married deal. Does anyone know who is the buyer?

[CityFarmer]

In 8 aug 2008, the founder Choo Heng thong sold his 24% stake in spindex.
It was only announced as a married deal. Does anyone know who is the buyer?

If it is 24% holding of the company, we should be able to catch clue from AR, statistic of shareholders section during that period.

[dydx]

FY12 (ended 30Jun12) AR makes interesting reading.....
http://info.sgx.com/listprosp.nsf/07aed3...200145c76/$FILE/Spindex%20Industries%20AR2012%20(full%20set).pdf

Such a decent and financially solid company, but Mr Market is just so reluctant to give Spindex a fair valuation - which ought to be at a premium over its latest NAV/share of $0.547!

I look forward to the coming $0.018/share Final dividend which will be paid on 19Nov12, with 'XD' date fixed at 2Nov12.

[dydx]

Direct competitor Innovalues' 3Q results just out.....
http://info.sgx.com/webcoranncatth.nsf/V...40043BA0B/$file/Innovalues_3Q12.pdf?openelement

Excluding the $9.764m insurance claims amount on damages to plant and inventories arising from the massive Thai floods in last FY12, Innovalues recorded an adjusted PBT of only $2.421m in the first 3 quarters, or approx. $3.23m on yearly basis. This is far lower than Spindex's PBT of $8.301m in the just ended FY12 (ended 30Jun12). In terms of revenue, Innovalues' $92.7m (derived from the revenue of $69.55m recorded in the first 3 quarters) on yearly basis is slightly ahead of Spindex's $88.0m in FY12.

As at 30Sep12, Innovalues' B/S is still saddled with a net total debts balance of $14.09m, whereas Spindex continues to operate with a large net cash reserve, hitting approx. $22.5m as at 30Jun12 - equivalent to $0.195/share.

It is quite obvious that Spindex is a better run company.

[dydx]

Spindex's 1H results just out.....
http://info.sgx.com/webcoranncatth.nsf/V...9001FE728/$file/SpindexIndLtd-1HFY2013.pdf?openelement
While 1H's NP is down mainly because of forex loss and higher income taxes in PRC and Vietnam operations, Spindex's 31Dec12 B/S remained rock-solid - with an equity of $62.4m and a net cash reserve of $23.9m, translating to a NAV/share of $0.5409 and a net cash/share of $0.207, based on the latest 115.365m issued shares.

Against today's closing share price of $0.355, Mr Market is now pricing Spindex at a 34.6% discount on its latest NAV/share of $0.5409. This offers a huge margin-of-safety for those who believe that as a well-established and consistently profitable business, Spindex's fair intrinsic value should be at least its NAV.

Obviously there is one simple way that Spindex's BOD can do more to reward shareholders - just pay out a portion of the over-sized cash reserve by way of 1 or more 'jumbo' special dividends!

[BlueKelah]

Is Spindex considered a strong company?

P/E 6.59
P/B 0.69
Div Yield 4.80%
D/E 1.76%
ROE 12.01%
Net Cash

It's a small but well managed company.

Can't really say its strong as it is still very small cap (40mil) and easily affected by economic ups and downs. Not much of economic moat of any kind really. Not much growth prospect either.

But due to its low profile and tiny cap, share price has been very stable. Very illiquid though, normally a couple of months before yearly dividend there is increased activity with some share price bump but after XD drop back to obscurity. Or sometimes some bored analyst will remark about its high net cash and share price trend up but soon no interest again.

At current price not very attractive for dividend, try to pick up around 30cents. Dividend also not stable, depends on that year's performance. Last year payout 1.8 from 6.1 cents of EPS, <30%

Note that the top 20 shareholders add up to 74% and composition largely unchanged for many many many years and not likely to change much.

So despite the high cash value and stable management, unless they start a dividend payout policy or do share buy back, I would say company like UMS is a better buy for precision engineering...

Good thing is with about 400k you can buy in more than 1% of the company and become one of the top 20 shareholders your name can appear in the annual report.

[felixleong]

this company looks undervalued, unfortunately its earnings are rather quite unstable, a bit cyclical