Spindex (KE)

Background: Spindex supplies precision-turned machined parts such as shafts, sleeves and fasteners used in imaging and printing, industrial machinery, automotive and consumer products. Imaging and printing products include copiers, fax machines and printers; industrial machinery includes electric drills; automotive includes sensor assemblies, throttle mechanisms and gear shafts; while consumer products include washing machines, irons and fishing rods.

Recent results: Full year to June 2011 results were weakened by forex losses from the soft US dollar, lower write-back for inventory obsolescence and a higher effective tax rate. Net profit fell 39% to $3.7m. However, costs were tightly controlled and balance sheet remained in a net cash position.

Key ratios…

Price-to-earnings: 7.7x Price-to-NTA: 0.5x

Dividend per share / yield: 0.9 SGD cents / 3.6%

Net cash as % of market cap: 53%

Share price S$0.25

Issued shares (m) 115.4m

Market cap (S$m) 28.8

Free float (%) 69.7

Recent fundraising activities Nil

Financial YE 30 June

Major shareholders Tan Choo Pie (24.4%) Peter M. Collery (6.1%) Yeoman Capital (5.9%)

YTD change -28%

52-wk price range S$0.21-0.36

Source: Company

Our view

A mature cash cow. Spindex is a tightly-run company in a mature industry. Its low fixed-cost cost structure gives rise to steady cash flow, which has assured shareholders of a good stream of dividends in the past five years (average 30% payout). Net cash as at June 2011 currently makes up 53% of its market cap. Further, its fixed assets are highly depreciated, which explains why, despite a 39% earnings drop in FY Jun11, gross margin was maintained within the long-term 18-21% band.

New focus. While earnings growth has been lacking in the past few years, Spindex is potentially getting a new lease on life although this is not yet apparent. It has invested heavily in the China automotive sector, jacking up its capex to $5-7m in FY Jun10-11 after holding it below annual depreciation at just $1-2m in FY Jun08-09. Automotive-driven revenue growth has outpaced other industry segments but the overall impact has been masked by the decline in the traditional imaging and printing business.

Betting on China automotive buyers. Spindex sees enormous potential in the automotive industry in China and plans to aggressively expand and market to new customers within this segment. China new car sales are expected to slow next year due to the economic slowdown, tighter monetary policy and increased competition. However, due to the push to go local in car part production, we expect China to remain the world’s biggest and fastest-growing vehicle market.