Adampak (KimEng)

Background: While it may be a bit simplistic to label Adampak as just a label manufacturer, it would not be far off. Of course, these labels are not the mailing labels one stick on envelopes but highly-technical labels used in the electronics, pharmaceuticals, computers and peripherals, petroleum and consumer industries.

Key products: Adampak produces labels such as barcode labels, heat-resistant labels and medical labels. Advanced labels include RFID labels for tracking and control, and security labels with optical technology used for counterfeit detection. The company also supplies die-cut components such as adhesive-free zone seals for HDDs, dampers, insulators and bonding tapes.

Our view:
Highly dependent on electronics. Although Adampak has been trying to broaden its customer base in recent years, the HDD industry still accounts for half of its sales. Another significant segment is telecommunications (7% of sales), while other electronics industries account for 31% of sales. In total, the electronics sector accounts for 87% of total sales and nonelectronics sales contribute the remainder. Labels account for 70% of group revenue while die-cut components account for 30%.

Started the year on an off note. Given its high exposure to the electronics sector, Adampak’s 1Q11 profits not surprisingly fell 35%. HDD-related sales fell 15% YoY while telecom sales fell 12%, led by a 25% plunge in sales of die-cut components to HDD customers. Gross margin also contracted 4ppt to 30% on the back of the lower sales as well as higher labour and raw material costs that it could not adjust fast enough. However, sales of labels to the nonelectronics sectors fared better, up 19% YoY.

Generous dividend payer. While Adampak has had its fair share of earnings ups and downs over the years, it has not stinged on the dividends. As the company is in a fairly mature industry, capex is not significant. This has allowed it to enjoy strong free cash flow generation. In the past five years, it has paid out 100% of earnings as dividends, and even during the recession years, dividend payout averaged about 60%. As at March this year, net cash accounted for 21% of its market cap.