ARMSTRONG: The story that is attracting fund managers

The Beginning

MR GILBERT ONG, 57, was an enterprising salesman with a rubber factory when he came up with a business idea. He left to operate from a backyard, using simple hand tolls to make rubber foam products to the marine industry. His wife helped him in the venture which began with a couple of thousand dollars in 1974.

As his business grew, he shifted to a large factory in Marsiling and, subsequently, Pandan Loop where I serve him in my capacity as a manager at the branch of one of the major local banks. I made it my business to know my clients’ business very well. I visited them often, and I had a good idea if their business was doing well or not. I reckon that Mr Ong, like other clients, liked my style of working.

Armstrong rode the electronics boom in Singapore in the 1980s by supplying foam and metal-stamping products. It moved into a 165,000 sq ft factory in Gul Lane in 1990. Shortly later, the bank posted me to its Seoul branch, a money-losing entity which I helped turn around. When I left after 4.5 years there, I had been promoted to Seoul general manager. After returning to Singapore, I visited Mr Ong as a friend.

I had a job offer from a Japanese bank at that time and was happy that Armstrong was becoming a listed company on the Singapore Exchange in 1995 with a market capitalization of over $70 million.

Tough Times

Armstrong's founder Gilbert Ong (left) persuaded Steven Koh to give up a successful banking career to run his automotive parts outfit.

When 1997 rolled around, Armstrong found itself in great difficulty. It had bought an industrial property as an investment at the peak of the property cycle and it had ventured into a non-core business, offset printing. It had also expanded rapidly overseas. These moves quickly drained the IPO proceeds and increased bank borrowing to $34 million.

Profit declined and some key executives left. Mr Ong approached me with a job offer, but I didn’t take it up right away given my established position in my 25-year career in banking.

He was convinced that both of us had the right chemistry to work well together judging from his encounter with me during my banking days. Several times, he showed me around his company and told me of his plans for the company.

His continuous persuasion, openness and vision finally convinced me to join Armstrong even though it operated in a field totally different from banking. In February 1998, I became Armstrong’s General Manager responsible for its Finance, HR, MIS and Administration Departments. 

Restructuring Armstrong

My banking experience equipped me to analyse Armstrong’s business from a different perspective.  My conclusion:  Armstrong has a good and unique business with quality clientele and a niche market.

It is like  a train running on a rocky road: it needed an engineer to put it back to the track.With Gilbert’s strong support, a restructuring programme was quickly put in place to strengthen the company’s cashflow, and enhance its risk, resource and cost management.

Credit and inventory control were tightened, idle assets and lowly-utilised assets were disposed.  Our overseas operations were directed to convert their borrowings from the parent company to local bank loans in order to reduce forex exposures. It was a lesson we learned from the 1997 Asian financial crisis. 

We started measuring resources utilization in term of sales per square foot, sales per machine dollar and sales per head count.  We also introduced competition among subsidiaries and departments via Key Performance factors and EVA (Economic Value Add) measures. Along the way, executives who could not adapt to the new culture left. 

After operations turned around in 1999, Armstrong decisively discontinued one of its non-core printing business with a write-off of $3.6 million in 2000.  It also seized the opportunity to fully amortise all its intangible assets such as goodwill and deferred preliminary expenses, writing off 100 percent of doubtful debts to give the company a fresh start.

Injecting Growth Drivers: Automotive Business

Steven Koh gives insights into how Armstrong stays nimble in the competitive manufacturing sector. Photo by Sim Kih

In enhancing risk management, we reviewed the company’s country risk, business concentration risk and technology risk.  To spread the risks, we decided to develop our automotive business, one of the sectors that we had focused less on in the past.

In those days, the business enjoyed far lower sales volume compared to our electronics business whose customers included hard-disk drive makers. We recognized that in the automotive business we could produce more than 300 parts.

We also recognised the opportunities in the underdeveloped car market in Asia. On our side were Mr Ong’s rich experience and knowledge in the field, and our German partner’s contact and technology. We turned confident that we could drive up our automotive business.

We struck gold, with intense support from government agency International Enterprise Singapore. Armstrong has since successfully clinched many automaker clients such as VW, Audi, GM and Peoguet, and first-tier system suppliers like Denso, Bosch, Calsonic, Delphi etc.

Contribution from the automotive sector has been increasing steadily from 3% of group turnover or $1.48 million in 1998 to 23% of Group turnover or $32.31 million in 2006.  This is now the fastest growing business sector within Armstrong.

We are confident there is more growth we can achieve. Armstrong has set its sights on $150 million in total automotive turnover or about 50% of Armstrong planned total sales of $300 million within 5 years.

Rubber Business

As the automotive business began revving up, we identified another growth driver: Armstrong’s rubber business. It started operations in 1992 with turnover of $2.2 million.  In 2001, about $1.4 millions losses were incurred out of total turnover of $2.8 million.At one stage, I was considering closing down the rubber operations to cut losses.

“I looked at the other rubber companies and found they were making good profits.  I asked my managers: Maybe we are in the wrong industry. For the benefit of Armstrong, we should either revitalize it or close it.”  Since Mr Ong started his career as a rubber parts salesman, I guess sentiment played a key part in our subsequent decision not to quit the business.

Armstrong's net profit margins and return on equity have multipled four to five times in the past five years

A new ‘crazy” general manager was put in charge and with a revised strategy, our rubber business  grew at a compounded annual growth rate of 45% over the last 5 years.  Today, it is one of the most profitable business sectors for Armstrong, achieving more than 15% net operating margin.

The 5 Cs

Apart from driving cashflow, profit and sales as well as enhancing risk, resource and cost management control, the changed Armstrong emphasized a 5C’s culture: Commitment, Competency, Contribution, Cohesiveness and Communication.

Armstrong has successfully transformed itself because of  its hardworking and committed staff, Mr Ong’s vision and support and my 25 years of banking experience.

Resource management is one the most important things.  Finding the right people for the right job is a great challenge for many organizations.  In Armstrong, people are a valuable asset.  After all, management is the art of getting things done through people!

Big Rewards

Armstrong's dividends have multiplied ten times in five years.

In recent years, Armstrong – which now has 16 factories across Singapore, Thailand, China, Malaysia and Indonesia and Vietnam- chalked up record profits and paid out record dividends to shareholders.

In 2006, Armstrong  reported a net profit of $10.2 million on sales of $141.2 million. It was our sixth consecutive year of sales and profit growth.  We have paid out good dividends for 3 consecutive years to shareholders.  Our balance sheet is strong with a net cash position. We generate more than 5 times sales for every dollar of fixed asset employed.

Our latest performance is sterling: In the first quarter of 2007, we reported a 104% jump in net profit to $3 million, on the back of a 23% increase in sales to $40.9 million. This was our maiden quarterly results announcement, a voluntary initiative in line with our objective of enhancing our corporate governance practices and increasing our earnings transparency.

Stock Matters

The company has attracted the attention of fund managers. One of them is Legg Mason, the 5th largest asset manager in the world with approximately US$969 billion in assets under management. On June 1, 2007, it was announced that Legg Mason had become a substantial shareholder with a 5.49% stake, or 28 million shares.

The market has begun to notice its business performance, and given its rewards.  Armstrong’s share price has increased from around 17 cents at the end of March 2007 to a high of 48 cents by July 2007.