gsg_stock discussion

Stockwatch- Adampak (Singapore) S$0.22

I found Adampak to be a micro-cap company with exposure to the electronic/manufacturing sector with a reasonable PE and dividend yield, plus very decent cash generation. Seagate is its largest customer.

One negative- one of its founder, Tham Kim Par, who retires in 2004, has been consistently trimming down his stake.

Company website: http://www.adampak.com.sg/

Since its incorporation in 1979, Adampak has grown to become one of South East Asia’s leading converters, producing all types of high-end labels, nameplates and die-cut parts for the electronic, pharmaceutical, computers/peripherals, petroleum and consumer industries. Today, it has wholly owned subsidiaries in Philippines and Thailand and associate companies in Malaysia and China to serve its worldwide customers. From a staff of 5 in 1979, Adampak currently employs more than 300 staff in total.

Here's some recent research reports after its recent strong 1H results:

WestComb- maintain BUY and target price of 33ct

Revenue growth of 25.7% and net profit growth of 51.0%
As a substantial part of the Group’s operating activities are in US$, the Group has changed the functional and presentation currency from S$ to US$ with effect from 1 January 2006.

1H06 results were in line with expectations. Revenue grew 25.7%, from US$ 12.08 million in 1H05 to US$ 15.18 million in 1H06. Average US$/Sing$ exchange rate was approximately 1.647 in 1H05 and 1.609 in 1H06. This was a decline of 2.3%. Revenue growth would have been correspondingly lower if the results had been reported in Sing$.

After review of the useful economic lives of assets, the Group has also changed the depreciation rate for plant and machinery from 20% per annum to 10% per annum with effect from 1 January 2006. The effect is that PBT for the period under review had been inflated by US$ 0.27 million.

Gross profit margin improved from 26.7% in 1H05 to 31.2% in 1H06 (29.4% if you exclude the effects of the change in depreciation rate). The improvement was due to better economies of scale and better performance from all operating units.

Other operating income increased US$ 0.41 million mainly because of exchange rate gains of US$ 0.27 million and gain on disposal of plant and equipment of US$ 0.14 million.
Income from associates declined 57.0% to US$ 0.27 million, as 1H05 contribution was inflated by write-backs, and gain on asset disposal, and 1H06 contribution was affected by start-up losses in a subsidiary.

The net effect was a 51.0% improvement in net profit from US$ 1.65 million in 1H05 to US$ 2.49 million in 1H06. We estimate that without the effect of accounting changes and exceptional gains, growth in operating profit could still have been more than 40%.

The purchase of the additional 50%-stake in Aident is still awaiting regulatory approval and we are not certain whether it will go through – hence we have taken out the impact of the purchase from our forecasts.

We expect revenue and net profit to grow in double digits in both FY06 and FY07, driven by continued optimism in the HDD industry and the Group’s new production facilities in Suzhou that gives them access to the vast PRC market. The Suzhou plant has commenced operations in July 2006, but is not expected to contribute positively in FY06.

The potential wildcard is the growth in the usage of RFID for baggage handling at airports and logistics and inventory management in the general supply chain. As technology improves and the price of RFID chipsets declines, there will be wider usage of RFID technology in the tracking of items. These RFID chipsets require converters such as Adampak to insert them into labels. Adampak should benefit as the usage of RFID becomes more widespread.

Interim dividend
Adampak has declared an interim dividend of 0.625 cents per ordinary share (less tax), which equates to a yield of 3.2%. This highlights the Management’s optimism of the Group’s operating cash flow and future prospects.

Forecasts and valuation
We maintain our target price at S$0.33, which is at a 15% discount to fair valuation of S$0.39 (8x FY06 PER) due to its poor trading liquidity. Maintain BUY.
Key risks include downturn in electronics (HDD) sector, loss of major customers, increasing raw material prices, price pressure from customers, unfavourable currency fluctuations and increasing competition on the basis of price.

Net Research Asia- Maintain BUY and target price raised from 29 to 31ct

Adding Excitement to the Stable Fundamentals
· Adampak reported strong revenue and profit growth for 1H06. Revenue grew 25.7% to US$15.2m and gross profit grew 46.5% to US$4.7m, backed by a higher gross margin of 31.2%.

· Two accounting policy changes have been adopted wef FY06. Functional currency has been changed from SGD to USD and depreciation rate has been reduced from 20% per annum to 10% per annum.

· Net profit grew by an impressive 51.0% to US$2.5m. Taking out the impact of the change in
depreciation rate, net profit and net profit margin would be US$2.2m and 14.6% respectively.

· Another year of strong growth is expected. Positive outlook in the electronics sector and HDD industry will continue boosting the demand for label, seals and other die-cut components.

· Impact of Seagate’s acquisition is likely to be felt in FY07. Management views this as a positive development as Seagate is the biggest customer of Adampak.

· New RFID (Radio Frequency Identification) tag business adds new life to the stable underlying business. RFID tags provide more attractive margins and management indicated that they were getting more enquiries on their RFID tag from potential customers.

· Target price has been raised from S$0.29 to S$0.31, backed by the strong fundamentals of the underlying business and potential new growth catalyst from the RFID tag business and Aident acquisition. The stock is currently priced at an attractive 4.2x current year earnings. Maintain BUY.

posted by gsg @ 3:18 AM