SERIAL SYSTEM: 1Q profit up 31%, on track for US$1 billion annual revenue

1qbrief4.14 Derek Goh, executive chairman of Serial System (left), briefing analysts and fund managers on the 1Q2014 results at the Tower Club on 29 April. Photo by Janine Yong

SERIAL SYSTEM recorded a 31% year-on-year jump in 1Q2014 net profit to US$2.1 m, and its executive chairman, Derek Goh, guided that it is on track to achieve its target of US$1 billion in annual revenue this year.

Revenue in 1Q weighed in at US$212 m. a 24% jump year-on-year thanks to a sizeable order from a Chinese manufacturer of smartphones. But this was a lower-margin order which impacted Serial's overall gross margins (9.0% versus 9.1% previously).

Serial is a distributor of electronic components such as semiconductors, modules and connectors.

The 1Q is typically the weakest quarter owing to the Chinese New Year holidays. However, 2H is typically stronger than 1H, which is why Serial expects the US$1-billion revenue target to be achievable.

As for its net margin, which came down to 1.0% in 1Q this year from 1.4% in 4Q last year, Mr Goh guided that it will improve in the course of the year, a pattern discernible in 2013.

Underlying that is a three-pronged strategy unveiled in Jan this year to derive more business from its existing product lines, expand its customer base and mine its internal data to improve inventory management and bulk purchasing.

1Q delivered results, including two key interesting developments:

This video is of South Pacific Laundry, an industrial laundry business which Serial has just acquired a 20% stake in.

1.Laundry business: Serial started recognising its share of profits from March 20 from 2 Australian companies in the industrial laundry business, which look set to contribute a meaningful amount to Serial's full-year bottomline.

From 20 March 2014 to end-March, Serial recognised US$30,000, which translates into nearly US$1 million on an annualised basis.

For perspective, Serial achieved US$11.2 million in FY13.

Serial paid an aggregate US$6.8 million cash for the stakes in E-Laundry & Dry Cleaning Services and SPL Investments.

Both service hotels, resorts, hospitals, care centres and restaurants in Melbourne, Sydney and country areas of Victoria.

Mr Goh said the laundry businesses, controlled by a Chinese of Malaysian origin, has many shareholders among their employees.

Serial plans to increase its stakes over time as it sees expansion potential of the businesses in Australia and beyond.

"They are highly automated and use things like RFID tags for the laundry pieces, which saves a lot of labour costs," said Mr Goh at an analysts' briefing this week.

Derek_AGM14 Derek Goh giving a 1Q results briefing to attendees after last Saturday's AGM. Photo: Cheng Siew HooiThe laundries use "unique technology and processes" that allow linens to be washed, ironed and folded in record time on an industrial scale -- which lead to healthy gross profit margins.

The net margins far exceed those that Serial's core electronics business achieves, which is why Serial seeks out even M&A deals involving businesses not related to Serial's core, Mr Goh said.

2.Factoring: Serial will sell its trade receivables to financial institutions starting from this quarter -- a move that will send its Trade Receivables turnover days (74 days in 1Q2014) and gearing (94%) falling sharply.

And its cash conversion cycle (67 days) will shorten significantly.

As at end-1Q, Serial had US$184.4 million in trade and other receivables.

What about the cost of factoring? It's "quite reasonable," said Mr Goh without revealing details.

The speedy cashflow for Serial arising from factoring will enable the company to save interest cost as it would then require reduced bank borrowings for working capital. As at end-1Q, Serial had US$138.5 million in short-term bank borrowings.

"Factoring will also enable all of us to sleep better at night," quipped Mr Goh.

boardagm14 @ AGM on 26 April (L-R): Independent director Robson Lee, executive director Peter Ho, independent director Paul Tan, executive chairman & group CEO Derek Goh, CFO Alex Wui, non-executive director Ben Goi, and independent director R. Ravindran.
Photo by Cheng Siew Hooi
For the Powerpoint materials, click here.

Recent story: SERIAL SYSTEM: Sizzling 4Q2013 on new strategy, FY14 to be better?

SERIAL SYSTEM: 1Q profit up 31%, on track for US$1 billion annual revenue

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