SINGAPORE (May 22): NRA Capital has an “overweight” call on Serial System with a fair value estimate of 24 cents ahead of the proposed spin-off of the group’s Hong Kong and China electronic components distribution business to list on the Hong Kong Stock Exchange (HKSE).

The fair value implies an upside of nearly 45% from Serial System’s current trading price of 16.6 cents.

See: Serial System plans spinoff of Serial Microelectronics (HK) on Hong Kong bourse

“Serial will collect back US$20.8 million ($27.9 million) of shareholder loans made to the spin-off company, to establish financial independence between the parent and spin-off company,” says analyst Liu Jinshu in a report on Tuesday. “The funds will allow Serial to expand the rest of its businesses while maintaining its high dividend pay-out of 50% per year.”

According to Liu, Serial System’s remaining electronic components distribution business make more than US$5 million a year, even though the spin-off company generates more than 90% of Serial’s earnings.

However, he notes that Serial will continue to maintain a majority stake in the spin-off company.

“The spin-off will not lead to a carve-out of Serial’s key profit drivers,” says Liu. “Serial will likely deliver robust growth in 2018.”

“We expect FY18 PATMI to grow by 46% to US$13.92 million and FY19 PATMI to grow by 6% to US$14.76 million. The group reported PATMI of US$5.2 million in 1Q18. Hence, Serial has already achieved 37% of our forecast in 1Q18,” he adds.

In addition, the group’s total revenue grew 22% to US$405.2 million, crossing the US$400 million mark for the first time in any quarter since the company’s inception.

See: Serial System's 1Q earnings almost double to $6.9 mil

The analyst says Serial System could consider setting aside part of the recovered capital for the payment of future dividends, as this would better align shareholders’ interests in relation to the spin-off.

“Serial currently trades at an attractive valuation of 9.22x trailing 12-month P/E and 0.77x P/BV and offers an attractive yield of 6.3% based on a dividend per share of 1.04 Singapore cents per share for 2018,” says Liu.