Spindex (SGX:564) – The Forgotten Multi-Bagger

Spindex Industries (SGX:564) is one of the small-cap counters in SGX with a market capitalisation of only $100.3 million. Even so, its share price has performed very well over the years. The share price has surged more than four times from its low of $0.19 in January 2012. Since its highs in 2017, this stock has survived a takeover bid and remains thinly traded in SGX. Can this forgotten multi-bagger reach new highs?

Company Overview

Founded in 1981, Spindex is a highly integrated solutions provider of precision machined components and assemblies with manufacturing locations in Malaysia, China and Vietnam. The company serves a customer base consisting of MNCs worldwide. It also has a comprehensive ITE certified in-house training programme and is an approved ITE Training Centre in the ITE Skills Certification in Autonomous Maintenance.

Their products and machined parts are predominantly needed in the imaging and printing industry, automotive and machinery industry as well as the consumer and lifestyle sector in everyday products.

Geographically, FY18 revenue that were derived from USA and Europe, China, Asean region excluding Singapore and Singapore came in at 37.07 percent, 38.17 percent, 21.71 percent and 3.05 percent respectively.

Distribution of Shareholdings

Guess what, if you own roughly more than 0.15% of the shares, you will be part of the top twenty largest shareholders! This also makes it one of the most illiquid stocks to trade in the market. This also partly due to the attempted acquisition exercise by Hong Wei Holdings, a private vehicle owned by Chairman Mr Tan CP.
They managed to raise their interest from 25.47% to 72.4% by acquiring 54.14m shares at a low-ball offer of $0.85/share. More to be elaborated below.

Management Profile

Board of Directors

The Board is headed by the two top executive management, Chairman Mr Tan Choo Pie and Managing Director Mr Tan Heok Ting.

Chairman – Mr Tan Choo Pie @ Tan Chang Hai

Mr Tan Choo Pie @ Tan Chang Chai is a shareholder of the Company and has been the Executive Chairman of the Spindex Group since July 1989. He plays an important role in setting the investment, expansion, diversification and overall strategy of the Group. Mr Tan has over twenty five years of experience in the die-casting, electroplating, precision turning, precision machining and various assembly businesses. He holds a Bachelor of Chemical Engineering degree.

Managing Director – Tan Heok Ting

Mr Tan Heok Ting was appointed Executive Director in 2010 and appointed as Managing Director on 1st July 2013. He is responsible for the Group’s overall management, operations and is also involved in the strategic planning, investment directions of the Group. He holds a Bachelor of Laws Degree and a Bachelor of Commerce degree in Accounting and Finance.

Non-Executive Director – Chen Chang Rong

Lead Independent Director – Chew Heng Ching

Independent Director – Chan Meng Wah Alexander

Independent Director – Peter Tan Boon Heng

Remuneration

From my observations, the top management is quite lean, with 2 key executive and 2 key management personnel. The breakdown shows that 50% of Mr Tan CP and Mr Tan HT comes from profit sharing. This is an plus point when evaluating management as a rather large portion of their salary depends on the company’s performance. My estimated total remuneration would be about $4mil, which is roughly 25% of their PBIT. This is still fair in my opinion.

Bidding War

On 9 February 2017, Spindex received a cash offer from Hong Wei Holdings, a private vehicle owned by Chairman Mr Tan CP, to acquire all the shares of the group at $0.85 a share under a scheme of arrangement. The offer price represents a 21.4 percent premium from the last transacted price of $0.70. After around three weeks, the arrangement quickly turned into a mandatory unconditional offer after the Tan family declared that they have secured a majority stake in the firm.

Things started to get exciting when Star Engineering, a subsidiary of investment fund Northstar Equity Partners, announced on 3 March 2017 that it is considering all options which includes making a conditional offer for all Spindex shares at higher price offered by Hong Wei. Spindex’s shares shot upwards to an intraday high of $0.94 before closing at $0.89.

The series of events eventually ended with the offer drawn to a close on 26 April 2017 with the offeror’s resultant shareholding standing at approximately 72.4 percent of the total number of issued shares of the company. Spindex’s share closed at $0.855 at the end of the day just slightly above its offer price. Apparently, minority shareholders felt that the offer price is not attractive enough for them to divest their holdings. As they did not manage to secure 90% , the general offer was unsuccessful and Spindex remains listed.

Financials

FY18’s Results

In FY18, Spindex achieved turnover of $153.3 million, 8% higher than FY17. Referring to the pie chart above, there is growth in all business segments. However, profit before taxation came in lower at $16.02 compared to $17.34 in the previous year. EPS remained stable at 12.18 Singapore cents due to lesser income tax. In FY18, they have included a gain on disposal of their factory at Neythal Road for $3.7mil. A first and final cash dividend of 3.0 Singapore cents per ordinary share was proposed.

Income Statement

Looking at their past 5 year performance, revenue increased 11.2% CAGR for the past 5 years. EPS is also on an upward trend with 13.8% CAGR. Gross margin has been consistent at around 20%. Overall, these are very impressive numbers and margins. ROE has also been consistent at the mid-teens. For the past five years, their ROE is above the industry median.

Balance Sheet

Spindex is currently in net cash position with zero debt. Current ratio is at a healthy 2.5. Cash and cash equivalent is at $29.19m, about $0.25 per share.
Spindex’s net cash alone made up more than one-quarter of its net assets of $110.6 million at 26.37 percent. Their financial strength enables Spindex to capitalize on potential business opportunities. Also, the group is also more than capable to reward its shareholders by maintaining healthy dividend payouts.

Point to note, their receivables is always higher than payables. This might imply that they have to pay upfront for their work done before receiving payment for the finished product. It is still pretty consistent, if not they might run into cashflow problems.

Cashflow Statement

For the past 5 years, they have invested quite heavily in their PPE. This has also affected their free cash flow, with FCF turning negative in 2011, 2015 and 2018. in 2018, they have invested about $20mil in capex. It looks that they need high capital injection for new plant & machinery every year to sustain the business.

This is also in tandem with what the Mr Tan CP said in the 2018 annual report. Current depreciation is about $7.7M in 2018. In FY2018, the Group embarked on a significant equipment renewal programme to boost productivity and manufacturing efficiency. Through investments in the latest highly efficient equipment, we are well positioned to deliver enhanced manufacturing services and higher value-added products to meet the complex and sophisticated requirements of our customers.

In FY2018, the Group embarked on a significant equipment renewal programme to boost productivity and manufacturing efficiency. Through investments in the latest highly efficient equipment, we are well positioned to deliver enhanced manufacturing services and higher value-added products to meet the complex and sophisticated requirements of our customers.

extracted from Spindex FY2018 Annual Report

I think it will eventually catch up if the spending continues. However, their past 5-year earnings growth have been impressive and their financial is strong, hopefully the business can continue to grow.

Valuation and Ratio

PE Rato	7.14
PB Ratio	0.90
PS Ratio	0.63
Price to FCF	23.51
Price to Op CF	6.50
EV-to-EBIT	3.59
EV-to EBITA	2.47
PEG Ratio	0.46
Current Raio	2.47
Quick Ratio	1.82

Trading at a share price of $0.87, and EPS of $0.1218, Spindex has a PE ratio of 7.14. After taking into consideration the profit gain from selling their factory at Neythal Road, it currently trades at PE of 9.8. With cash per share of $0.23, this also provides a decent margin of safety to invest at current price levels. My fair value for Spindex would be around $0.95 to $1, about 10% margin of safety from current price levels.

Closing

Based on Spindex’s ratios, I considered it to be still underpriced. FCF is in line with net income and the accounting is straightforward. They virtually also have no debt. All in all, it looks like a nice value stock.

Of course there’s the worry that it’s a long term cyclical and all its recent gains come from the economic upturn. However, even if net income growth becomes zero, its PE ratio is still 9, which is not overvalued or anything.

A problem I faced when conducting qualitative analysis on the business is that they have no precise product breakdown. All I can deduce is that 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 went up.

Hopefully, they can continue to improve their business and ride out the current economic turmoil which has affected their top and bottom line. Looking forward to their next financial report. Cheers

Note: Moss Piglet is vested in Spindex at an average price of $0.90.