Serial System Ltd - Tayrona Financial Research 2018-08-17: Staying Gung-Ho And Yet Vigilant

Serial System Ltd - NRA Capital Research 2018-08-17: Staying Gung-ho And Yet Vigilant SERIAL SYSTEM LTD SGX:S69

Serial System Ltd - Staying Gung-ho And Yet Vigilant

2Q18 would have been a record quarter, if not for non-operating expenses.

  • Serial System reported a 39% year-on-year decline in PATMI from US$3.4m in 2Q17 to US$2.04m in 2Q18, mainly due to non-operating items such as US$1.97m of currency translation loss, US$2.67m of impairment and fair value losses. Excluding these items, we derived a record adjusted profit before tax of US$11.0m for 2Q18, compared to US$7.2m in 1Q18 and US$5.9m in 2Q17.

Gross margin likely to exceed forecast through rest of 2018 as productivity measures bear fruit.

  • Sales grew by 9% year-on-year to US$408.7m and gross margin recovered to a high rate of 8.2% in 2Q18. The last time Serial’s gross margin exceeded 8% on a full year basis was in 2014. Hence, the group’s efforts to streamline its consumer products business and to improve the efficiency of its electronic components distribution business have borne fruit.
  • In our forecasts, we project gross margin of 7.44%. We now expect group gross margin to exceed our forecast for the full year, as the margin recovery sustains over the rest of 2018.

~ ~ Where SG investors share

Established management team mitigates against key man risk.

  • We noted that the group Executive Chairman and CEO Dr Derek Goh has been requested to assist in investigations in Taiwan in relation to the group’s 19% owned associate Bull Will Co., Ltd. The group has clarified that no charges have been brought against Dr. Goh to-date and has emphasized that its business and operations remain unaffected.
  • We highlight that Serial has a diverse board and an established management team. Hence, the group’s business will likely continue as usual, in the worst-case scenario.

Taking opportunistic approach towards any downturn.

  • The group is planning to list its Hong Kong and China electronic components distribution business (“Spin-Off Co”) on the HKSE, just as the US/China trade tariffs are starting to affect global supply chains. Undeterred by these risks, the group’s broad strategy is to capitalise on any downturn by making selective business and talent acquisitions.
  • In the interim, the group is strengthening its balance sheet via exercises such as the listing of the Spin-Off Co, which will lead to the repayment of US$20.8m of shareholder loans.

Share price has factored in downside risk, but not upside potential.

  • Serial System’s share price has fallen by about 12% since news of the Taiwan investigations broke. Currently, the group trades at 0.68x P/B and 8.85x trailing 12-month P/E.
  • We argue that much downside risk has already been factored into Serial’s share price and maintain our Overweight rating with an unchanged high return and low-average risk view.
  • Given that 1H18 PATMI grew by 23% year-on-year, the group has raised its interim dividend from 0.29 cents to 0.4 cents (annualized yield of 5.5% over S$0.146).

Liu Jinshu NRA Capital Research | Tayrona Financial 2018-08-17
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