I have previously written a post on Spindex Industries Ltd (read here). I felt that Spindex is a fundamentally good company with a long history of good performance. However, at the current stock price, it appears to be overvalued.
A reader asked me about my views on Innovalues Ltd in comparison to Spindex Industries Ltd.
Profile wise both these 2 companies are quite similar:
- Innovalues specializes in the manufacturing of customized precision machine parts and components, including automotive components, printer rollers, mechanical devices, and sub-assemblies, as well as surface treatment services such as electroless nickel plating, zinc phosphating and hard anodizing. The Group’s products are mainly produced for the automotive and office automation equipment industries, with its automotive products geared towards fuel efficiency, environmental protection and vehicle safety.
- Spindex Industries Limited is a highly integrated solution provider of precision machined components and assemblies with manufacturing locations in Singapore, Malaysia, China and Vietnam. The Company serves diverse market sectors consisting of MNCs in imaging and printing, machinery & automotive systems and consumer related products.
First let’s compare their revenue/turnover business segment.
- Spindex appears to be more diversified, whereby the Machinery & Automotive segment only takes up 45.84%. It is also quite involved in Imaging & Printing (33.96%). In its latest Annual Report, it is reported that “Growth was underpinned by higher levels of business activities in both the Imaging and Printing (IP) and Machinery and Automotive Systems (MA) business sectors….However, contributions from the rest of the Group’s businesses, categorised under “Others”, were lower due to weaker demand from the health care industry as well as a slowdown in the sales of components for certain domestic and consumer appliances.”
- On the other hand, Innovalues derives majority of its revenue from Automotive (81%). In the latest annual report, it is stated that “Group’s overall revenue rose by 9.2% yoy to S$108.5 million, mainly attributable to the increase of orders from customers in the Automotive (“AU”) segment. The increase was partially offset by the decline of orders from customers in the Office Automation (“OA”) segment.”
My first thought is that Spindex’s diversification seems to serve it well, with both twin contributors in Imaging and Printing (IP) and Machinery and Automotive Systems (MA) business sectors.
Next, let’s look at their revenue/turnover by Geographical Locations.
- Spindex derives most of its turnover from PRC (41.52%), followed by ASEAN (31.28%), then US, Europe and others (21.68%).
- Innovalues derives most of its revenue from PRC (~60%), US (~20%), then Malaysia (~10%).
My first thought is that Spindex again is more diversified. Given the slowdown in China and moderate growth in ASEAN & US, Spindex seems to have a better outlook in the near and moderate future.
Now let’s take a quick look at their financials.
- In terms of valuation, Spindex would appear to be more undervalued. Its P/E, Price/Sales, Price/Book and EV/EBITDA all appears to be lower than Innovalues’.
- However, in terms of profitability, Innovalues would be better. Its profit margin, operating margin, ROA, ROE and quarterly revenue growth all appears to be better than Spindex’s. This could explain why investors place a higher value to Innovalues. With a ROE of 27.19%, it can be considered a growth stock. Although technically, Innovalues is a much bigger company as compared to Spindex (Enterprise Value for Innovalues is SGD261.14M as compared to Spindex’s SGD47.91M).
- In terms of Balance Sheet, I would say both are conservatively run. eg. debt level in relation to cash level is low. However, if we are to compare, Spindex would be better off (during liquidity crisis).
- The dividend yield of Spindex is 3.49% while that of Innovalues is 1.38%. So for yield investors, Spindex would be a better choice.
Now let’s look at the free cash flow and historical earnings growth.
- The free cash flow for Innovalues appears to be having an upward trend over the years, as compared to Spindex’s.
- In addition, the 5 years CAGR for Earnings before interest taxes depreciation and amortization (ebitda) growth rates of Spindex and Innovalues are 8.81 and 21.41 respectively. So again, Innovalues appear to be better.
I find it quite hard to calculate the trailing PEG and intrinsic value of Innovalues as I can’t find its 5 years EPS growth rate (in ft.com).
Using a crude calculation of the CAGR of the 5 yrs EPS base on the 2013 to 2017F EPS in KGI’s report (read here), the 5 yrs CAGR for EPS of Innovalues is approx. 28.34%.
Let’s look at their trailing PEGs.
- Spindex: The trailing PEG will be 7.85/(3.49+15.06) = 0.42. Which is good (< 1). Base on EPS 5 years growth rate of 15.06.
- Innovalues: The trailing PEG will be 17.74/(1.39+28.34) = 0.6. Which is good (< 1).
It appears that Spindex may be more of a bargain here.
Actually, I feel that profile wise both companies are quite similar. However Spindex seems to have an edge here in terms of diversification, having the twin contributors in Imaging and Printing (IP) and Machinery and Automotive Systems (MA) business sectors. Also geographically, its turnover is also more diversified.
Having said that, in terms of growth, Innovalues is the better company. Historically Innovalues has a better track record in terms of free cash flow and earnings growth. There is a high possibility that the consistency in the good performance of Innovalues would carry on in the future. However, growth prediction is always very subjective.
Investors seems to value Innovalues strong growth and its stock price reflects that. Consequently Spindex appears to be more undervalued. Both companies have conservative balance sheet. So fundamentally they are strong.
In fact, currently I am quite divided between the two (as to who is the better bargain). However, I am of the opinion that Innovalue is the faster growing company.
I read in the Value Buddies forum that some consider these to be cyclical stocks. When one look at the cash flow from operations and EPS over the years, the trend is not linear. This is especially pronounced in Innovalues’ case. So I will be very careful when buying these stocks.
The principles of value investing work best during market crashes. In the event of any market downturn (whereby most stocks would be a bargain), I would have preferred Innovalues because of its higher potential earnings growth.
“Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.” Warrren Buffett
Hi. Thanks for the detailed comparison. However, I still like the upside potential of Spindex because of its valuation which is way undervalued compared to innovalues. I also like the track record of Spindex. Innovalues suffered financial losses in the past. I also expect ROE to be at least 15% when they realease FY result. It’s getting better every year even without taking any borrowings. I’m optimistic on their FY result and I think it will be quite noticable. I wonder if Mr. Market will relook this company and give it a fair valuation.
I am not really familiar with these 2 companies (Spindex and Innovalues). Personally there are things I like about Spindex, eg. the smaller market cap, more diversified business segments & geographical locations for revenue. And of course great The Value Investing Almanack blog post – which makes a very in depth study of the company and the founder.
However, I don’t like the fact that people seem to describe these companies as cyclical, and the fact that their operating cash flow and earnings are erratic (not in a consistent uptrend). It lessens my conviction. Also I am not very sure of their business moat (since the business is still beyond my circle of competence).
Nevertheless, will study more on these 2 companies. Thanks.
Thanks. Not sure where to comment this, but would like to see your view on Silverlake Axis. Isn’t it on your radar? It is another company on my radar before and took advantage of the recent sellings.
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My thoughts on Silverlake Axis.
Basically I can only comment on its financials. I am not familiar with is business model / moat.
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