Is Spindex Industries Ltd A Hidden Gem?

Spindex Industries Ltd (SGX: 564) manufactures precision-machined components and provides assembly solutions to clients in main industries such as machinery & automotive systems, imaging & printing, and consumer-related products. It is headquartered and listed in Singapore with four production facilities situated in Malaysia, China, and Vietnam. As of 23 October 2019, it is valued as much as S$ 114.2 million in market capitalisation. 

In this article, I’ll cover on its recent financial results and valuation figures. Here are 13 key things to know about Spindex before you invest.

• Segment 1: Machinery & Automotive Systems (MAS)
  It achieved a CAGR of 13.9% in revenues for the last 10 years. Revenues had increased from S$ 22.0 million in 2010 to S$ 70.9 million in 2019. It is due to receiving rising orders from its key customers in that period. It has been and still is a driver of growth to Spindex.

Source: Spindex’s Annual Reports

• Segment 2: Imaging & Printing (IP)
  Revenues from IP had remained relatively stable at S$ 30-35 million per annum since 2011.

Source: Spindex’s Annual Reports

• Segment 3: Others
  This segment is involved in serving clients who manufacture consumer- related products such as consumer electronics, appliances for domestic use, data storage, and telecommunications. It has achieved a large hike in segmental revenues in 2016 and 2017, contributed from sales orders for components for domestic appliances. Thus, revenues have grown to S$ 48.2 million in 2019, up from S$ 18.7 million in 2010.

Source: Spindex’s Annual Reports

• Geographical Markets
  Spindex has been increasing its proportion of group revenue from both the U.S. and European markets significantly for the last 10 years. These markets served as a major driver of growth to Spindex while its original markets of China and ASEAN had continued to generate stable streams of income to Spindex. The breakdown of its revenues are as follows: 
  

Markets	Revenue 2010 (S$ ‘000)	Revenue 2019 (S$ ‘000)	Revenue 2019 (% of Group Revenue)
China	30,275	54,186	34.8%
ASEAN	39,413	37,670	24.2%
U.S., Europeand Others	12,365	63,956	41.0%
Spindex’s Group	82,053	155,812	100.0%

Source: Spindex’s Annual Reports

• Group Profitability
  Overall, Spindex had achieved a CAGR of 7.4% and 10.8% in both group revenues and shareholders’ earnings for the last 10 years. Revenue had grown from S$ 82.1 million in 2010 to S$ 155.8 million in 2019. This has led to growing earnings from S$ 6.1 million in 2010 to S$ 15.3 million in 2019. The financial results are largely attributable to two key customers who had accounted for 43.2% of Spindex’s group revenues in 2019. The manufacturer has a ten-Year Return on Equity (ROE) average of 11.75%. It means, it has generated, on average, S$ 11.75 in earnings a year from every S$ 100 it has in shareholders’ equity from 2010 to 2019.

Source: Spindex’s Annual Reports

• Cash Flow Management
  From 2010 to 2019, Spindex has generated S$ 139.93 million in positive cash flows from operations. Out of which, it has spent:
  
  – S$ 91.0 million in net capital expenditures (CAPEX).
  – S$ 24.3 million in dividend payments to its existing shareholders.
  
  
  Overall, it increased its cash reserves from S$ 22.4 million in 2010 to S$ 42.3 million in 2019. Evidently, Spindex has built itself a track record for raking in positive cash flows and had prioritised its cash utilisation onto CAPEX over making dividend payments to its existing shareholders over the ten-year period.

Source: Spindex’s Annual Reports

• Balance Sheet Strength
  As of 30 June 2019, Spindex has S$ 0.3 million in loans and borrowings and S$ 119.0 million in shareholders’ equity. As such, its debt-to-equity is 0.25%. It had reported S$ 102.4 million in current assets and as much as S$ 39.2 million in current liabilities. Thus, its current ratio is 2.61.
  
• Cash Conversion Cycle (CCC)
  In 2019, Spindex’s cash conversion cycle is 77 days, which is made up of the following:

Debtor Days	Inventory Days	Creditor Days	CCC Days
66	75	64	77
It takes Spindex 66 days to collect cash from its customers after billing them.	It takes Spindex 75 days to make a sale of its products to its clients after having manufactured them.	It takes Spindex 64 days to pay its bills after it was billed by its creditors.	Spindex has kept its CCC at 77 days, which is relatively at stable levels for the last ten years.

• Major Shareholders
  As of 10 September 2019, Hong Wei Holdings Ltd (Hong Wei) is the key shareholder of Spindex Industries Ltd with 75% shareholdings. As such, the Tan family emerges as the key indirect shareholder of the company.

No.	Substantial Shareholders	Shareholdings in Hong Wei (%)	Leadership Position in Spindex
1	Tan Choo Pie @ Tan Chang Chai	55%	Chairman
2	Tan Ai Wang	25%	None (Wife of TCP)
3	Tan Heok Ting	20%	Managing Director

Source: Spindex’s Annual Reports 

• Future Prospects
  Moving on, Spindex had acquired a land adjacent to its current plant at Hanoi, Vietnam, where it would construct a new plant. The completion of this plant is expected to be by early 2020.
  
  Also, it has invested in a new site in Nantong, China. Development in its new site in Nantong will be carried out in stages.
  
• P/E Ratio
  As of 23 October 2019, Spindex is trading at S$ 0.99 a share. Hence, the company’s current P/E Ratio of 7.45, above its 10-year average of 6.67.
  

• P/B Ratio
  In 2019, Spindex has net assets of S$ 1.03 a share. Thus, its current P/B Ratio is 0.96, which is above its 10-year average of 0.78.
  
  
  

• Dividend Yields
  In 2019, it has declared 3.30 cents in dividends per share (DPS) which is a continuous increase from 1.50 cents in 2010. Thus, based on its stock price of S$ 0.99 a share, its current dividend yield is 3.33% per year. It is below its 10-year average of 4.21% per annum currently.

Source: Spindex’s Annual Reports

VIA’s Verdict 

Spindex has delivered growth in revenues, profits, and dividend payments to its existing shareholders for the last 10 years. This is largely attributable to two key customers, which presents a concentration risk of customers to shareholders. It has plans to further expand its production capacity in Vietnam and China. 

At current price, it is trading above its long-term averages in P/E and P/B Ratio. It is offering below average in dividend yields. Thus, the question remains: ‘Will you invest in Spindex at S$ 0.99 a share today?’ 

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