Excerpts from analyst's report

NRA Capital analyst: Liu Jinshu

Focus on Core Business

component»  Operations as per normal for Serial’s business. We noted that the Executive Chairman and Group CEO of Serial System Ltd Dr Derek Goh Bak Heng is under investigation in relation to the Securities and Futures Act of Singapore.

The company has clarified that it understands it is not the subject matter of the aforesaid investigations, and that business and operations will continue as normal. Hence, we keep our view on Serial and take this chance to update on its 3Q15 result. 


»  Visible forward strategy and developed management team justifies upside. Although Serial reported lower profitability in 3Q15, we continue to like Serial for its strength in the overall Asia-Pacific ex-Japan market and its future plans to grow revenue and profitability. On the whole, we do not foresee operations to be disrupted in spite of Dr Goh’s matters, as Serial today has a credible team of senior corporate executives, including a Group Chief Operating Officer, senior vice presidents in charge of corporate planning, and other functions, as well as regional and country heads.

»  Consumer products business saw high growth. Serial I-Tech group and Swift Value Business Pte Ltd contributed US$50.2m of revenue in 3Q15, growing by 73.7% over 2Q15. For this business segment, Serial plans to focus on higher margin and growing product segments such as mobile device accessories. As for Swift Value, Serial plans to leverage on the former to either distribute more of HP products or expand into regional markets. Swift Value makes about US$1.0m/year.

Liu JinshuValuation of S$0.200 still offers high upside. Although 4Q results are likely to be similar to that of 3Q, we estimate net profit of US$14.5m for FY16 on 12% revenue growth. Accordingly, we value Serial at the peer average of 8.9x FY16 EPS or S$0.200 based on USDSGD rate of 1.4. Assuming 40% to 45% dividend payout, dividend yield is expected to be about 6% to 8% over the next 12 months. -- Liu Jinshu (photo).

» Asia-Pacific ex-Japan and China grew 13.8%. Excluding contribution from the consumer products business, electronic components revenue grew by 13.8% year-on-year in markets other than Hong Kong and China.

This suggests that Serial’s core business remains strong and that the 3Q results were partially due to the slowdown in the Chinese market. 49% owned associate Achieva Technology Pte Ltd contributed US$0.8m of losses during 3Q15. Achieva distributes Intel and Western Digital products and has the potential to drive long term growth. In the interim, Serial plans to progressively turnaround Achieva and increase its stake in this business.

However, we noted that Serial’s net gearing increased to 147% as of September 2015 as working capital took up US$25.2m of cash. We look forward to tighter working capital management to improve gearing, failing which further financing may be required.

Full report here.