Serial System Ltd - NRA Capital 2018-05-22: Spin-off To Unlock US$20.8m Of Capital

Serial System Ltd - NRA Capital 2018-05-22: Spin-off To Unlock US$20.8m Of Capital SERIAL SYSTEM LTD SGX: S69

Serial System Ltd - Spin-off To Unlock US$20.8m Of Capital

To claw back 19% of Serial’s market cap in cash after Spin-Off.

  • Serial System Ltd plans to and has obtained shareholders’ approval to list its Hong Kong and China electronic components distribution business (Spin-Off Co) on the HKSE. Next steps include the submission of listing documents and approval by the HKSE.
  • Serial System will collect back US$20.8m of shareholder loans made to the Spin-Off Co, to establish financial independence between the parent and Spin-Off Co. The funds will allow Serial to expand the rest of its businesses while maintaining its high dividend pay-out of 50%/year.

Remaining components business makes > US$5m/year.

  • Based on disclosures in Serial System’s circular and annual report, we can deduce that Serial System’s electronic components distribution business outside of HK and China made about US$5.6m in 2017. Moreover, Serial System will continue to maintain a majority stake in the Spin-Off Co. Hence, the Spin-Off will not lead to a carve out of Serial’s key profit drivers.
  • Finally, losses at the CPD segment have narrowed in 2017 and we expect this trend to continue. Hence, the rest of Serial System is likely to report higher profitability in 2018.

46% PATMI growth in 2018 to mitigate lower share of Spin-Off Co profits

  • We expect the Spin-Off to take place in late 3Q18 or early 4Q18.
  • As 2017 earnings were dragged lower by impairment charges, we do not expect the Spin-Off to affect Serial’s group PATMI in 2018. There may be some earnings gap in 2019, which we expected to be offset by broader growth. We expect FY18 PATMI to grow by 46% to US$13.92m and FY19 PATMI to grow by 6% to US$14.76m.
  • The group reported PATMI of US$5.2m in 1Q18. Hence, Serial has already achieved 37% of our forecast in 1Q18.

Minimal to zero exposure to ZTE

  • Our channel checks also indicate that Serial has minimal to no exposure to ZTE and that Serial System’s outlook remains intact despite ZTE’s ban from buying US products and technologies. 
  • We foresee some risk from currency translation losses arising from the depreciation of the CNY, which we estimate at US$0.56m thus far in 2Q18.

Declaring a dividend plan would help value discovery.

  • Serial System currently trades at an attractive valuation of 9.22x trailing 12-month P/E and 0.77x P/BV and offers an attractive yield of 6.3% based on a dividend per share of 1.04 Singapore cents per share for 2018.
  • We value Serial System at S$0.240 which implies an upside of 45% from current Serial System's share price of S$0.166. Hence, we rate Serial Overweight with a high return and low-average risk classification.
  • We do not rate Serial as low risk as its business is sensitive to global economic conditions and the recovery of the US$20.8m of capital is still conditional upon the completion of the Spin-Off.
  • We also suggest that Serial can consider setting aside part of the recovered capital for the payment of future dividends to better align shareholders’ interests in relation to the Spin-Off.

Liu Jinshu NRA Capital | 2018-05-22
SGX Stock Analyst Report OVERWEIGHT Maintain OVERWEIGHT 0.240 Same 0.240