Serial System Ltd - NRA Capital Research 2017-03-23: Bouncing Back With A Vengeance

SERIAL SYSTEM LTD SGX: S69

Serial System Ltd - Bouncing Back With A Vengeance

Serial’s share price has gained 30% since our last update to trade at 25.0x FY16 earnings. However, we also noted improved gross margins during 2H FY16 and that the rally in semiconductor, i.e. DRAM and NAND, prices since 2H 2016 has sustained into 1Q 2017. Therefore, we foresee that Serial will likely enjoy a strong rebound in profitability in 2017 and forecast PATMI of US$13.5m in 2017.
Based on the projected FY17F EPS of 1.5 US cents, Serial is trading at 8.5x forward P/E, lower than the peer average trailing 12-month P/E of 11.3x.

We have previously indicated that Serial would perform better in 2H16 driven by the recovery of the China market. This scenario has since materialised as revenue from Hong Kong and China grew by 32% and 11% respectively in 2016.
For 2017, we expect Serial’s electronic components sales to expand by 18% to US$1.44 billion driven by growth in China and contribution from the addition of a major semiconductor brand as a supplier (which may add a few hundred million to annual revenue).
Group revenue is expected to grow by 8% to US$1.5 billion due to lower consumer products sales.

Given the rally in semiconductor prices, we expect margins to continue to improve in 1H17 as semiconductor companies run down their inventories. The average inventory turnover days of 18 major semiconductor companies has shortened from 98 in 2Q16 to 92 days in 1Q16 and is likely to decline further in 1Q17 on strong demand (as implied by the rally in selling prices).
With inventory remaining low, prices may stay elevated for some time in 2017 as semiconductor companies take time to restock their supply chains.

In FY16, electronic components was the only profitable segment with the consumer products and other businesses suffering an operating loss of US$6.1m. The loss could have been due to restructuring efforts as Serial has reduced consumer products revenue to only US$16.9m in 4Q16 versus US$173.3m for FY16. These losses are likely to narrow and raise profitability.
In addition, we noticed increased investment by Serial in Hong Kong and China.

FY16 comprehensive income attributable to shareholders of US$8.7m was better than expected, exceeding our forecast by 23%. More importantly, the 4Q16 results showed strength with gross margin recovering to 7.4% from 6.6% in 2Q16.
Based on the peer average of 11.3x P/E and FY17F EPS, we derived a valuation of S$0.240 for Serial, translating to 35% upside.
The risk is that Serial may undergo slightly higher share price volatility after the recent run up; albeit mitigated by the recent pullback from the intraday high of S$0.193.

Liu Jinshu NRA Capital Research | http://www.nracapital.com/ 2017-03-23

SGX Stock Analyst Report OVERWEIGHT Maintain OVERWEIGHT 0.240 Same 0.240