The tech manufacturing industry is a key component in the value chain of industries including automotive, telecommunications, consumer electronics and household appliances. Singapore is home to a large number of tech manufacturing and assembly stocks, mostly in the mid- to small-cap range of less than $1 billion.
Over the recent few months, a series of investments or takeover offers have been made for some of the notable companies in this sector. They include a privatisation-cum-delisting offer of $2 per share for Hi-P International by its chairman Yao Hsiao Tung in December 2020; a $99.7 million buyout offer from electronics service provider, AEM Holdings, for electronics contract manufacturer, CEI, in January 2021; and the $1.65 per share offer for Sunningdale Tech jointly made by its chairman Koh Boon Hwee with the Novo Tellus private equity fund in November 2020. The rationale for these corporate actions is mainly centred around business synergies, apart from cheap and attractive valuations of takeover targets.
Spindex Industries is a precision machines components manufacturer and assembly solutions provider. Spindex mainly serves the following business sectors: imaging and printing; machinery and automotive systems; and consumer appliances and related products.
In March 2017, Hong Wei Holdings, the company’s major shareholder, attempted to privatise the company at 85 cents a share. Given its cheap valuations, Spindex is expected to remain an attractive target for privatisation, in line with industry trends.
Spindex, with its measly market cap of $107.3 million, is not covered by any analysts. The company is also very thinly traded, with an average three-month trading volume of just 0.14% of its total shares outstanding. The company also has a public float of 28.9%. These factors indicate that there is a strong possibility that the market’s valuation of the company may not be reflective of the true value of Spindex — and that the company is undervalued. However, if the company is not privatised, Spindex’s attractive valuations and growth will eventually draw more coverage and trading liquidity, and lift the share price closer to its fair value.
Financially, the company checks all the right boxes. At its Feb 3 share price of 98.5 cents, Spindex has a PE ratio of 9.3 times — much lower than the industry’s average of 15.6 times. The company also trades at a 39% discount for its price to book ratio compared to the average of its peers. Spindex’s yields, specifically its cash flow, is impressive with 26.2% and 11.8% for its operating cash flow and free cash flow respectively. The dividend yield is decently attractive at 2.8%, compared to the benchmark risk-free-rate of 1.1%.
Profitability-wise, the company has a stable operating margin of 9.2%. Spindex’s ROA and ROE are also attractive at 7.4% and 9.9% respectively. Spindex currently trades at a premium of 11.2% to its NAV and NTA, which is a good sign in terms of margin of safety. In terms of financial health, the company is in a secure position in terms of liquidity and solvency. Spindex also has a debt to equity of just 2.4%, a current ratio of 3.0 times, and interest cover of more than 100 times.
Spindex, in its annual report for FY2020 ended June 30, 2020, cited that the economic impact of Covid-19, along with trade tariffs, is expected to remain drag for the industry’s earnings over the next 12 months, at minimum. However, the company has taken necessary initiatives to improve its competitive edge, such as through building new plants and plant expansions in China and Vietnam. Additionally, in June 2020, Spindex announced a JV with Acuger Precision Corporation to undertake the manufacturing of plastic moulds, plastic products and related assemblies in Vietnam.
We would like to reiterate our statement from last year that Spindex is a relatively safe medium-term play. We estimate Spindex has the capacity of giving over 15% returns for the year, either through a takeover, or dividends and capital gains. Based on the company’s trading price of $0.985, Spindex is an undervalued and under-the-radar player in the electronics manufacturing market.
