SINGAPORE (Jan 17): Flying under the radar of investors, Spindex Industries is a manufacturer of precision machine components and assembly solutions provider for customers in imaging and printing; machinery and automotive systems; consumer appliances and related products. The US-China trade war has hurt Spindex and many of its industry peers, but we see Spindex as an attractive, undervalued manufacturer with limited downside risk.
Spindex attracts little to no coverage from analysts and market observers alike. This implies that there is a high likelihood that the market’s valuation of the company may not be reflective of its true value. This effect is known as the price to value divergence, where the price over- or under-reflects the intrinsic value of the company. Spindex is also very thinly traded, averaging just 5,934 shares in daily volume traded (59 lots) over the past 200 days. It also has a public float of just 25%. But as the company grows over time, Spindex could gain more coverage, trading liquidity, and possibly move towards intrinsic value. However, these parameters are dependent on whether Spindex is currently undervalued or overvalued.
For now, Spindex’s fundamentals, based on quantitative metrics, are strong. Relative to its regional peers, Spindex’s P/E is just 8.0 times, or almost half the peer average of 15.8 times. Spindex also trades at a 56% and 34% discount for its Enterprise Value/Ebitda and P/B respectively compared with the industry average. Yields are impressive as well, particularly its cash flow, with operating CF and free CF yields at 21.2% and 13.8% respectively. Dividends are also decently attractive at 3.1%; almost double that of the 1.7% risk-free rate.
With a third of its revenue from China, Spindex does face headwinds from the trade US-China trade war even though there are some signs of a truce. But even if the trade war prolongs or worsens, Spindex should be able to maintain strong operating margins over the medium term through operational efficiency.
In addition, Spindex has a solid balance sheet to lean on. The company currently trades at a 1% discount to its NAV and NTA. Furthermore, the company is in a comfortable position in terms of liquidity and solvency; as it has low debt, is cash rich, and has a current and quick ratio of 2.6 times and 1.8 times respectively. Based on how the trade war has progressed, the worst-case scenario doesn’t seem a likely possibility, and Spindex should continue performing well.
On top of the operating fundamentals, DBS Group Research points out that trade diversion (due to the trade war) has made companies such as Spindex an attractive takeover target candidate, given that it is illiquid, has a low free float, is in net cash, and is trading at attractive valuations. In the past, Spindex’s major shareholder, Hong Wei Holdings, tried to privatise the company in March 2017 at 85 cents a share.
As an investment, we view Spindex as a relatively safe medium to long-term play with good potential of giving over 15% returns for the year, either through a takeover or dividends and capital gains. Our valuation of Spindex is $1.20 based on the discounted cash flow analysis. Based on the company’s trading price of $1.05, Spindex appears to be an attractive grab for the year with minimal downside.
