Serial stock has climbed on a recovery in the tech sector.
Excerpts from SIAS Research’s initiation coverage of Serial System …..
The full report can be accessed at the Serial System thread in our forum.
SERIAL SYSTEM Ltd’s prospects look bright with major semiconductors and electronics companies raising their revenue forecasts. Serial is poised to ride on the expansion of these companies especially after it secured two new major distributorships last year – Texas Instruments in Taiwan and Tyco Electronics in Hong Kong, China and Taiwan.
Serial’s main edge is its large customer base and distribution network in China.
While the major distributors such as WPG Holdings continue to target the top tier customers, Serial’s hold over the 2nd and 3rd tier manufacturers offer value to its suppliers who want to ensure deep distribution of their products within China and yet will prefer to deal with orders of significant volume.
China is expected to continue growing at its breakneck pace going forward.
Growth estimates range from the government’s target of 8% to more than 10% in 2010.
As such, demand for electronic components and semiconductors will continue to be strong.
Derek Goh, executive chairman, CEO & founder, Serial System
Many major brands will want to build market share in China. This is where Serial (www.serialsystem.com.sg) comes in with its established network of manufacturers on the ground.
We believe that the key risk behind Serial is its lack of size and hence, limited economies of scale. Therefore, the slightest change in margins can materially affect the bottom line.
However, Serial has been paying out close to 50% of its profits as dividends each year. As such, loyal investors can participate in a significant share of profits in good years.
We have conservatively valued Serial at 10x FY10F EPS. Nonetheless, Serial should trade at multiples closer to its peers as its revenue base approaches them over time. Invest with an intrinsic value of S$0.140.
In line with its strategies to grow its revenue base, we forecast a 15% YoY growth in revenue to S$640m byFY10F and incorporate a 0.2 percentage point increase in gross margin to account for the expansion of the higher margin passive components product line.
Essentially, we project a PATMI of S$10.8m for FY10F and S$11.2m for FY11F, representing strong earnings growth of 44% and 21% respectively.
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However, FY10F EPS will come in at 1.42 cents up only 28% over FY09. Serial currently has 100.5m warrants outstanding that will expire by 20 December 2010. Given the positive outlook of the company, we think that most of these warrants will be converted to shares, diluting EPS.
On a positive note, Serial’s shareholders will enjoy a nice dividend payout of 0.51 cents a share, representing a dividend yield of 5.4% over its last close of S$0.095.
This implies a payout ratio of close to 50%. Based on our forecast profits for FY10F and FY11F, we can expect annual dividends of 0.65 cents and 0.78 cents, or a yield of 6.5% and 7.8% respectively.
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