SERIAL SYSTEM: 44% leap in FY14 net profit on record US$1 billion sales

Executive chairman & CEO Derek Goh at last week's results presentation.
Photos by Janine Yong

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CEO Derek Goh in a jovial mood. Photo by Leong Chan TeikAFTER trading in a tight range for most of last year, Serial System's share price broke out, climbing from 13.3 cents to 14.3 cents -- or 7.5% -- in two days last week.

The run-up was triggered by its 4Q results release which showed that the 4Q net profit jumped 52% to US$4.6 million while the full-year's figure was up 44% at US$16.1 million.

As a result of the higher earnings, Serial's share price now trades at a historical PE ratio of just 6X.

Not only is the valuation looking palatable, so is the dividend yield at 7.3%. Serial is proposing a final dividend of 0.75 cents a share, after having paid out an interim FY2014 dividend of 0.30 cent a share.

Furthermore, the stock price is at a discount to the net tangible assets per share of about 18 Singapore cents a share.

2014profit

In the electronics distribution business of Serial System, economies of scale and tight cost controls matter greatly.

These featured in its FY2014 results. Highlights:

» Surpassed FY2014 revenue target of US$1.0 billion to reach US$1.04 billion (FY2013: US$ 817.0 million).

» Net margin improved to 1.6% from 1.4% in FY2013.

» Total expenses as a percentage of sales declined to 7.4% in FY2014 from 8.0% in FY2013.

» Turnover in North Asia (Hong Kong, China, South Korea, Taiwan and Japan) grew 30% y-o-y, accounting for 84% of the Group’s turnover.

Underpinning the business is its three-pronged strategy announced in Jan 2014 (see: SERIAL SYSTEM: US$1 b sales target, higher margins with enhanced biz strategy).

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CFO Alex Wui. Broadly, Serial said the enhanced strategy involves:

a. Expanding Serial's product portfolio and increasing the proportion of higher-value components -- ie, what Serial sells.

b. Improve internal efficiencies with emphasis on financial management, supply chain management and business intelligence -- ie, how Serial will do certain things.

c. Deepen penetration in existing markets and widen geographical expansion -- ie, where Serial will go.

More growth in 2015

In its FY2014 results announcement, Serial said, barring unforeseen circumstances, it "expects the financial performance for FY2015 to be better than that of FY2014."

Serial's topline will benefit from its 2014 acquisitions of two businesses, though it remains to be seen if they will break-even (from being loss-making) and contribute significantly to the profitability in the near term.

In aggregate, these two acquisitions had annual revenue of about US$130 million prior to their being acquired by Serial.

Below is more information on these two acquisitions -- and a new distribution that will add on to the strongly growing core electronics distribution business.

In addition, Serial is likely to finalise agreements to factor out its accounts receivables, which will sharply reduce its gearing and yet not compromise its net profit margin (after taking into account factoring costs).

Achieva_prodt2.15 Examples of products that Achieva distributes.» 49% stake in Achieva: This was acquired on Sept 2014. Achieva is a distributor of cloud computing-related products for suppliers such as Intel and Western Digital.

In addition, Achieva has a presence in Australia, which Serial's electronic components distribution business doesn't have.

» 100% of distribution and trading entity of GSH Corp. This was completed on 31 Dec 2014 and the business has been re-named Serial I-Tech Group.

It distributes lifestyle and consumer electronic products of brands such as Apple, Tamron, FujiFilm, and watches of Adidas and Fossil.

Their markets include Central Asia, Middle East, Vietnam, Cambodia and Kazakhstan -- where Serial does not have a presence in.

Serial, on the other hand, is a distributor of components to customers that are OEMs for end products of brands such as Apple, Xiaomi, Lenovo, LG, Haier and Samsung.

Thus through the acquisition of GSH's unit, Serial has expanded its distribution network. "We want to be like 7-11, being near to our customers and supplying whatever they want -- at competitive prices," said CEO Derek Goh.

Serial_ITech2.15 Examples of consumer products that Serial I-Tech Group distributes.

seangoh2.15 Sean Goh, senior VP for corporate planning, development and regional marketing.
Photo by Janine Yong
» New distributorship: In Feb this year, Serial announced that its wholly-owned subsidiary, Serial Microelectronics Pte Ltd had been appointed a distributor by Fairchild Semiconductor.

Serial Microelectronics will distribute all Fairchild products and solutions in Greater China, Southeast Asia and India.

This rides on one of Serial's strongest attributes -- its extensive distribution network comprising 58 sales offices in the Asia Pacific region.

The big geographical coverage is overseen by Serial's SAP system that tracks purchases, inventory, deliveries, etc across its entire group, requiring senior management approval for certain types and sizes of transactions, said Sean Goh, senior VP for corporate planning, development and regional marketing.

Serial's press release said the Fairchild distributorship is expected to contribute to the net tangible assets per share and earnings per share of the group this year.

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