A micro cap with high growth, low valuation and decent dividend.
October 12, "05.
Below is an original member article first published for members only on September 16 "05.
I would rate SPPT 3.5, with a "speculative buy view".
SPPT’s return on equity (ROI) is very high (32%0 and so seem the forward earnings momentum. The recent net profit margin was 23.5%. Go to the below link and enter the symbol "SPPT" , scroll down and see the extensive review of this company: http://www.set.or.th/set/companyinfo.do?type=profile
I think this is the original prospectus. Here is a short review from there, as I gathered, late at night: (Since it was from just a few months ago it can hardly be viewed as dated).
Single Point Parts (Thailand) Public Company Limited ("Company") (with Specialty Precision Part Co., Ltd as its previous name) was founded by a group of Thai management on July 23, 1997 with an initial paid-up capital of 50 million Baht. The company is a manufacturer of high precision turned parts for HDD. The parts are for devices used in industries, which need high precision such as computer, printer, motor, telecommunication devices, connector for optic fiber, vehicle parts, digital camera, and VDO camera, etc. The company started by the group of the entrepreneurs who have long-term experience and good relationship with major multinational HDD manufacturers relocated their production bases to Thailand.
They foresee the potential and the expansion of electronics parts industries and the factor that Thailand is the second largest production base for HDD manufacturing.
Examples of manufacturers who are based in Thailand are Seagate Technology (Thailand) Ltd., Western Digital (Thailand) Co., Ltd., Hitachi Global Storage Technology (Thailand) Limited and Fujitsu (Thailand) Co., Ltd.
These four companies together have market share of more than 80% of total value of the market in 2003. In addition, Thailand is also the production base for many manufacturers of computer accessories (e.g., printer) such as Canon Hi-Tech (Thailand) Ltd. OKI (Thailand) Co., Ltd., and Seiko Epson Co., Ltd. This results in greater demand for electronics parts.
In the past, such parts are imported. However, due to problems regarding delayed delivery, price and quality, such manufacturers then looked for potent local subcontractors. As mentioned, from the formation of a group of experienced entrepreneurs including good relationship with some major manufacturer, the company was founded and operates until now. In addition, the company received an ISO 9002 from TUV Anlagentechnik Gmgh certifying that standard and quality of the company has met the international standard.
SPPT has BOI privileges. This is a real plus. As BOI besides tax benefits helps companies to promote their business.
This company plans to expand its business into other industries by producing products for the automobile industry. Currently, the company has started producing for automobile industry and negotiating with customers in other industries such as medical equipment to expand the customer base according to increased production capacity. Furthermore, it has planed to expand the scope of production to widely cover the production to reduce the production cost.
Some risk are a high percentage of their sales goes to the leading company in Thailand called Mineba.
Here is how they address this:
Nevertheless, Minebea and the company have transacted for more than 5 years since the company operated. The company has good relationship with Minebea and being trustworthy. Moreover, the nature of business needs mutual benefit and trust, which are characteristics in transacting with Japanese companies. In addition, HDD market has a trend of high expansion, which sales of the memory and reading unit in magnetic disk-hard disk in 2003-2005 has an approximate compounded growth rate of 15%.
Furthermore, many large foreign companies have moved their production bases to Thailand and has continuously expanded their investments. This results in an increase of orders to Minebea. The company is the largest subcontractor of Minebea for pivot. In 2003, the company has a market share in pivot production of 8% of total pivot of Minebea. Besides Minebea, the company also gives services to other customers including JVC and Seiko with total sales (together) of 25.47 and 28.32 in 2003 and in the first three quarters of 2004, respectively.
Another risk is the Japanese/Thai Baht currency variation as it directly impacts profit of the company "because the company cannot immediately increase price of the products when the material cost increases". Some 52.3% of the total outstanding shares (after IPO) belong to Mr. Prapoth Pholpipattanapong’s group and management, they are capable to control votes and resolution of the shareholders" meeting such as director appointment etc... but this can be the plus as they clearly have much at stake. Since the IPO in February SPPT shares have increased some 45% in value, this even while the SET index peaked last February and currently is about 3-4% lower since. Hence SPPT"s IPO was a rare success to investors this year.
Insiders were given some 8% of outstanding shares at a 10% discount to the IPO price. But these shares offered to employees have a silent period of up to 18 months since the first date that the company’s shares are traded in the SET. The silent period is the rule determined by SET. Existing shareholders will be able to release 25% of total shares (in the silent period) every 6 months after the first trading day. So the first release just passed in August. After 18 months, the remaining amount can be released.
The just past 4 year track record shows earnings growing from 44 mill. to 100 million Baht. Net profits were 69 million for the first 6 months of this year. I think SPPT can earn 120 mill Baht this year and 165 mill next year. This translates into 0.48 per share for 2005 and 0.62 per share for next year. The p/e is so 7.3 on calendar 2004 earnings and dropping to 5.5 for year 2006. Book value per share is 1.95. This all strikes me as cheap.
However members should note that there are only 250 mill. shares outstanding and the free float is some 50% less then that as the owners control over 50% of the outstanding shares. Hence even to my standard this company is small and potentially the shares illiquid. SPPT should be rated as a micro cap, not a small cap. Also I have no inside knowledge or view on the reputation of senior management. Still all things considered its worth rating this company as a speculative buy as it seems to have high growth along with an expected dividend yield above 5%.
Best Regards,
Paul A. Renaud.
PS. SPPT’s latest earnings report
To: President The Stock Exchange of Thailand As released to the SET on August 8th 2005.
Subject: Explanation for an increase of over 20% of net profit for the quarter ended 30 June 2005
With respect to our company’s operating results for the second quarter ended 30 June 2005 which shows a net profit of 35.9 MB, an increase of 15.8 MB or 79 % from the second quarter of 2004. We would like to submit the reasons for this remarkable improvement in our operating results.
1.Sales Income
Our company’s main income were from sales and toll manufacturing of 145.8 MB, an increase of 55.8 MB or 62% comparing to the same quarter of 2004. The increased value was from expansion of our manufacturing capacities in the late 2004 and continue on current period. The results of the expansion cause an increase in sales income. The increase in manufacturing and sales
for Hard Disk Drive (HDD) Components especially in HDD 2.5 and 1 inches is amount to 53.7 MB, an increase of 42.5 MB or 380 % from the same quarter of 2004. The increased demand for HDD was for consumer electronic appliances which we realized that the demand continues to grow significantly in 2005.
2.Others Income
Others income of 8 MB is the sale for scraps from production process, an increase of 5.8 MB compared to the same period of 2004. The increased of others income was due to an increase in production volume and the higher selling price for current period.
3.Cost of Goods Sold
For the second quarter of 2005,the company’s cost of goods sold was 105.2 MB or 72% of total sales income which increased by 1% of the same quarter previous year. The increase in cost of good sold caused by the more production expenses from our expansion which took some time to fully and effectively utilized the capacity. Gross margin decreased from 29% to 28% comparing with the same period of 2004. Net profit contribution increase from 22 % to 24% in current period.
4.Selling and Administrative Expenses
For the second quarter of 2005, selling and administrative expenses was amount to 9.1 MB or 5.9% of total revenue which was decreased from 8.9% of 2004. Total revenue increased of 61.1 MB or 67 % over the same period of 2004. Total revenue increased much more than total expenditure, resulting to an increase in net profit of 15.8 MB or 79% over the same quarter of 2004.
Please be informed accordingly.
Yours sincerely,
(Mr.Chakrit Methigunchanan)
Managing Director
