Spindex Industries

[dydx]

Just checked my bank account and noted a very nice credit from Spindex's total $0.0185/share Final & Special dividends for FY10 (ended 30Jun10). Feeling great!

Based on the last done share price of $0.31, and assuming the same dividend payout is sustained, Spindex's current annual dividend yield now stands at 5.97%p.a.

Of course, I hope to see Spindex, under the proven management and leadership of Chairman Tan Choo Pie, growing its already well-established regional precision machining business further and in a sustainable manner. I also hope to see Spindex increasing its profits as the company scales up its business volume. Based on the company's long operating track record, Spindex's ability to generate recurrent profits and a growing FCF - as well as to continue paying out decent annual dividends - is very much assured. Of course, I wish that Spindex will one day spring a pleasant surprise, by paying out a 'jumbo' special dividend from the company's huge cash reserve of over $20.0m (equivalent to some $0.20/share).

[gimbeng]

actually what was interesting was how well spindex's price held up yesterday during the market downturn!

[dydx]

Today (8Feb11), smaller competitor Santak Holdings has issued a 'positive' Profit Guidance statement for H1 (ended 31Dec10)-FY11.....
http://info.sgx.com/webcoranncatth.nsf/V...10018F7A7/$file/Profit_Guidance.pdf?openelement
In the statement, the company informed that its precision engineering operation experienced "significantly higher revenue and better gross margin achieved arising from the ramp up of mass production of precision engineering projects during HY2011."

It will be really great if Spindex also experienced the same fortune! Can't wait to see the H1 (ended 31Dec10)-FY11 result announcement, which should be released very soon (last FY10: the H1 result was released on 5Feb10).

[D123]

My first impression is that Spindex operates in a cyclical, commodit-ized industry. It is better to look at long term records of performance, within the company, and the industry as a whole. Since I can't find 2003 data, here's what I have collected from the annual reports available, unadjusted.

[Image: 2ugpajd.jpg]

To assess company performance, the usual metrics like profit margins, ROE, ROA, receivables turnover, debt/equity, liabilities/equity, interest coverage, and free cash flow should apply.

The decrease in earnings in 2005 and 2006, and negative free cash flows in 2005 poses questions, and I would attribute the large increase in [edit] 2010 largely to an inventory bounce where MNCs were re-stocking after being overly conservative during the financial crisis [edit]

(Even the chairman said so in AR 2010: "Due to this economic recovery and the increase in global demand for consumer products, the Group achieved broad based improvement in sales across all business sectors as major customers replenished their inventories")

So if you look at just the figures from 2002 to 2010, earnings have not really grown much.

[dydx]

H1 (ended 31Dec10)-FY11 results just out and make interesting reading.....
http://info.sgx.com/webcoranncatth.nsf/V...3001E2561/$file/SpindexIndLtd_1HFY2011.pdf?openelement

While the results are nothing to shout about, I think it is relevant to note that a much bigger forex loss of $1.285m (vs. $433k in H1-FY10) is the main culprit which dragged down H1's NP to $1.785m. If the USD were to rebound (especially vs. the SGD) going forward, I suppose we can reasonably expect Spindex to book a forex gain on its USD-denominated monetary assets (mainly trade receivables and some cash balances) in the coming reporting periods.

[starbugs]

The results are rather disappointing even if forex loss is neglected. Selling expenses rose quite a fair bit. Capex also rose significantly.

[dydx]

Selling expenses rose quite a fair bit. Capex also rose significantly.

Distribution and selling expenses actually fell 7%, from $740k in H1-FY10, to $690k in H1-FY11. The reduction in OP and PBT was mainly due to an increase in administrative expenses to $5.28m (up 26%, from $4.207m in H1-FY10), which included a much large forex loss (net) of $1.285m (vs. a smaller loss of $433k in H1-FY09).

The seemingly larger-than-normal capex of $4.872m incurred in H1-FY11 was anticipated, as it was mentioned in both the FY10 results announcement and AR. When Chairman Tan Choo Pie decided to spend some $5.0m on capex in FY11 "to replace as well as expand production capacity to meet growing demand from customers" (as mentioned in his Chairman's Statement in the FY10 AR), should Spindex's shareholders get overly worried?

[freedom]

low operating profit margin. not sure whether it is a long term value investment.

[kazukirai]

I think the following points are worth considering when reviewing Spindex's 1H11 results:

- Is there a likely reversal of the USD vs. the SGD
- Is the decline in Net Profit temporary (i.e. just for this 6-12 months)?

My personal assessment is that:

1) Spindex's fall is due to a decline in general economic conditions.
- Yes, Net and Operating margins have fallen. But look at the details.
- Sales have increased, albeit very slightly.
- The loss was mainly due to the USD depreciating against other Asian Currencies.
- Their customers have finished with inventory restocking (taken from FY2010 commentary). This suggests that results this half would have been less than spectacular. It could be a bad year for Spindex if the economy starts to slow further.
- Spindex, as already pointed, has increased capex a fair bit so that when demand picks up, they will be there to capitalise on that.
- Trade receivables have come down quite a bit (~20%) suggesting that the company has been prudent in making collections.

2) Spindex still has very strong balance sheets.
- Net cash position.
- Debt greatly reduced.
- At 35cents, it is still below it's Net Tangible Asset of 48.1 cents.

3) Things going against it
- I think in the long-run, the USD will only depreciate further. The only way that's not going to happen is we have China's economy tank. However, that's going to be worse for everyone else.

I'm not advocating to buy or sell Spindex but I think that there's no need to go Chicken Little about Spindex's results. The company seems to be run by capable people and I don't think the business that they are in is in danger of becoming obsolete in the near-term future.

However, the market dis-agrees with me. Spindex is down 5 cents to $0.30 at point in writing. Margin of Safety is becoming wider.

[D123]

The seemingly larger-than-normal capex of $4.872m incurred in H1-FY11 was anticipated, as it was mentioned in both the FY10 results announcement and AR. When Chairman Tan Choo Pie decided to spend some $5.0m on capex in FY11 "to replace as well as expand production capacity to meet growing demand from customers" (as mentioned in his Chairman's Statement in the FY10 AR)

Yes, but from the 10-year history of Spindex's earnings, we can see that such demand from clients can be ephemeral. In a commodi-tized industry, there are hundreds of competitors who can do what you can do. Most of the competition is on price. And customers will have no qualms about changing suppliers to cut their costs. Just look at the statements made by Spindex and Santak:

Spindex AR 2005: "Group turnover declined 4% to $48.1 million. A combination of factors contributed to this dip: price competition caused by surplus capacity, weaker US dollar, delay in customers’ project implementation as well as a change in the supply chain of a major customer."

Santak AR 2010: "The significantly lower sales in PE&A were mainly due to decrease in demand in our China operation for the precision-machined components and assembled products for the telecommunication sector from a major customer. Sales orders from certain customers were also affected by competitive pricing pressures especially in the hard disk drive sector."

Thus, I would hesitate to say that growth in this commodit-ized sector has a high degree of sustainability. Capex and earnings will likely ebb and flow with business cycles, and not necessarily in an upward trend. Spindex's revenues grew 5.2% annually from 2001 (bad year for IT and electronics sector) to 2010 (good year of inventory re-stocking) while net earnings grew only 2.7% annually, showing how hard it is to gain market share even if you expand overseas, and how hard it is to maintain profit margins.

The reduction in OP and PBT was mainly due to an increase in administrative expenses to $5.28m (up 26%, from $4.207m in H1-FY10), which included a much large forex loss (net) of $1.285m (vs. a smaller loss of $433k in H1-FY09).

When you are in the business of selling machine parts to customers like HP and other foreign customers, exchange rate risk is something you have to bear constantly. If exchange rate risk fluctuations affect your bottom-line so much, you should hedge it out.

If anyone thinks that exchange rates are mean reverting and it will be okay in the long run, just look at the past 30-year record of the SGD and USD. The data is on the MAS website, and the trendline is undeniably upwards for the SGD. Study also the history of the Swiss Franc against the USD, or the decline of the British pound as an international currency of exchange.

If foreign exchange losses end up being a large factor of profit declines, management have no one else to blame but themselves.

nett cash reserve of $22.46m

What might be more appropriate to use as a calculation of how much cash is ready for distribution might be taking cash and subtracting all long term liabilities, as well as the cash needed for working capital. I believe to maintain a current ratio of at least 2, cash of about $13 to $14 mn needs to be set aside. That leaves about $8 mn of cash left as what I would call reserve. This can then be readily used for dividend distribution or new projects. So I think just taking the $22 mn figure might be misleading.

Taking the last close price of $0.35, and a 10-year-sans-2003 average earnings per share of $0.038, it currently trades at 9.2 times earnings. If you want to take into account the $0.08 per share of "free cash", it trades at 7.1 times earnings. Whether that provides enough margin of safety depends on your risk appetite. In view of these, I think evaluations of Spindex should come with a larger than normal margin of safety.