SINGAPORE (March 23): NRA Capital is maintaining its “overweight” rating on Serial System, the distributor of electronics components and consumer products, at a fair value estimate of 24 cents following its recent share price run-up since the research house’s last update on the counter.
In a Thursday report, analyst Liu Jinshu notes improved gross margins and sustained semiconductor prices since 2H16 into the current quarter. As such, he foresees the group enjoying a “strong rebound in profitability in 2017”, and forecasts a PATMI of US$13.5 million ($18.9 million) for the year.
(See also: Serial System’s 4Q earnings quadruple to $5.7 mil on one-off gain and higher income)
Liu also expects Serial’s electronic components sales to expand by 18% to US$1.44 billion in the current financial year, driven by growth in China and contributions from the addition of a major semiconductor brand as a supplier, which the analysts believes may add “a few hundred million” to annual revenue.
“Given the rally in semiconductor prices, we expect margins to continue to improve in 1H17 as semiconductor companies run down their inventories,” he adds.
“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. With inventory remaining low, prices may stay elevated for some time in 2017 as semiconductor companies take time to restock their supply chains,” explains the analyst.
Highlighting that electronic components proved Serial’s only profitable segment in FY16, Liu also thinks the losses in consumer products and other businesses are likely to narrow and raise profitability.
“We are more concerned about potential risks that may offset Serial’s growth. Such risks include any potential slowdown in 2018 and whether there would be any trade tariffs that may disrupt Serial’s supply chain,” he cautions.
As at 11am, shares of Serial System are trading 1 cent higher at 19 cents.
