Adampak.

September 5, 2008
Analysis of Adampak (Part III - An Interview with the CEO)

I was invited by nextinsight.com.sg to publish this article at http://www.nextinsight.com.sg/content/view/602/60/

I had the great honour to meet up with Adampak CEO Mr Chua on 29th August at Adampak's office at Loyang Way. Prior to this meetup, I had submitted the analysis and list of queries lock-stock-and-barrel, to him via his secretary. He had already read through everything and gave me very interesting observations about Adampak and its business. I did not make any recordings, as it will be too rude; everything existed as just a verbal discussion that flowed for 90 mins.

I have summarized and properly categorised my takeaways from my conversation with him, as below. In all my analyses, as more information is acquired, it is only natural that the perceptions evolve and are refined to greater accuracy. Penned in this blog will be the observations and corrections to past erroneous perceptions. Please do not be alarmed as you encounter conflicting propositions as compared to earlier research reports.

On business strategy:

1. Gun for the big deals from the MNCs in any available sector
Mr Chua revealed that Adampak's business strategy is to focus on securing contracts from big time multi-national corporations and making their name known amongst them. Business from other MNCs will then automatically come through referrals etc. Gunning for deals from MNCs is a good strategy and there are two key benefits: firstly, Adampak can ride along on the bustling growth of the MNCs; secondly, increased resilience to regional economic impact. In 1997 when Asian was struck with the financial crisis, sales of Adampak continued to increase at double digit growth, simply because a bulk of Adampak's sales went to US, European MNCs.

The fact that 90% of Adampak's sales derives from the electronic sector is an outcome that is just somehow generated as Adampak just grew it's portfolio over the years; there was no deliberated or active efforts on a particular market focus.

2. Establishing a localised presence as a proximity advantage
In Mr Chua's words, "In this competitive industry, the first one in, wins." In the manufacturing industry, for customer companies to engage a manufacturer, they have to first go through a lengthy qualification process to assess whether the manufacturer is up to standards and can match their requirements. It is after the qualification process that the manufacturer will stand a chance at gaining a part of the contract. A localised presence has helped Adampak obtain more customers who have qualified their plant.

The best exemplification is China. Adampak set up a factory in Suzhou Industrial Park geographically sited alongside many MNCs and the company has an added proximity advantage over other non-local label suppliers based in South-East Asia. In many ways, this move has helped to increase the list of customers who qualified Adampak's plant. In recent months, the number of suppliers based in China has increased sufficiently for a break even point to be achieved at Adampak Suzhou. And it is expected for the number of qualified suppliers to continue to grow

3. Building strong relationships with suppliers to achieve a preferred label converter status and increase revenue streams
Over the years, Adampak has forged strong relations with their suppliers. Today, Adampak is a preferred label converter to 3M, which will recommend their clients to adopt Adampak's services. This further lends credence to Adampak's reputation and opens up an additional revenue stream.

4. Building a strong reputation of quality, reliability, consistency in service delivery
At first glance, it does appear that anyone can do the job of printing labels. But to be able to do the job, consistently, every time is an immense challenge. This is a critical success factor: over the last 20+ years, Adampak has built a strong brand of being able to consistently deliver high quality products on schedule. The brand is there, and the big corporations like HP, FedEx, Seagate, P&G, major telcos, etc. all know Adampak for its ability to consistently deliver at the lowest cost. It was also revealed that HP has been using Adampak's services for the last 20 years since the Adampak was founded. How amazing for a little factory that started in Loyang Avenue!

On growth drivers

RFID
"RFID faces a chicken and egg problem. No one wants to take the lead in adoption; everyone just want to be the follower of a tried, tested technology". Those were words of Mr Chua. The history of barcode labels is a very good case study. It used to be very expensive in the early phases of industry adoption, every company only started to catch on the wave when major players started using it and costs concurrently went down. Likewise, RFID in 3rd Party Logistics will definitely come as the next big wave, as it greatly simplifies inventory management, let's wait patiently to see this sector blossom.

On competitors
According to Mr Chua, it is hard to claim that Adampak is the industry leader in South-East Asia because the coverage is just too difficult to ascertain. There are so many companies operating in a similar fashion in the region, and all are covering different scopes with different strategies. Just to name a few, like Brady, Zephyr (these I know) and ITW, etc. I would estimate there are 10 odd competitors in this industry.

Nonetheless, Adampak is certainly no small player here. Mr Chua shared that a lot of MNCs know Adampak when it comes to die-cut products and high end labels, and companies acknowledge Adampak's reputation for a consistent delivery of quality products. This is a good sign of a company that probably counts as the top few of the list.

He also revealed that Zephyr did make an attempt to break into China many years back, but the venture failed miserably and never materialised, and this made Zephyr's management adopt a more conservative approach of keeping to local confines of Malaysia and China.

On production capacity and scaling up capabilities rapidly
Adampak's factories run 24 hours shift. Mr Chua shared, "in this industry, there's no way you can survive if you work only on 1 shift". The plants run at full capacity for 5 full working days, and during peak periods, the staff work overtime. Clearly, Adampak is running at maximum operating capacity, with little evidence of any excesses.

One of the critical success factors for the manufacturing business is the ability to flex and scale up production capacity rapidly within a very short notice. If a company does not have strong processes in place, achieving a rapid scaling up will not be possible. Mr Chua shared that Adampak has the ability to set up new plants, new factories and get them up and running in a matter of 2~3 months.

On financial management
The sense of financial prudence

Mr Chua shared that the management closely watches the returns on equity. In addition, the company practises a good sense of financial prudence because the management is always fully cognizant of the risks involved in credit calls when banks face a liquidity crunch. Adampak has consistently maintained a high current ratio (current assets over current liabilities), whereby the short term borrowings and liabilities are well within the company's capabilities to repay within 1 year.

Good cashflow management
He also mentioned that Adampak happens to be doing well in this area and is very fortunate because "the customers see the company not as bankers", and their clients have been very prompt and regular with their payments. This is another sign of a well managed business where the company has a very strong relationship of trust and goodwill with their clients.

On process re-engineering and cost rationalization
Adampak does not have a specific department on this. But what they have are a few key staff trained in Six-Sigma (a qualification in process streamlining to reduce costs). Initiatives on cost rationalization are always on-going. For quality checks, computerised imaging was employed a few years back, but there are problems with obtaining a consistent output. Hence the idea was shelved and manual labour is retained. "Nothing beats a visual check", he says.

Putting the money at where there are greatest cost savings/avoidance
If there are any projects ongoing, Mr Chua cited that the company will generally invest more resources to refine the key processes that are potential show-stoppers in the entire manufacturing process. For example, one of the showstoppers in the label manufacturing chain is the punching of label holes and unwarranted retention of debris that causes clogging. This was mentioned by Mr Chua to be a real problem where resources in engineering were diverted to improve the process because of the immense costs of failure in the entire chain.

On Aident
Mr Chua shared that the original plans for Aident was to secure a public listing on the Malaysian Stock Exchange. However, for some reasons, this did not materialise.

I vaguely recalled that in one of my conversations with a Malaysian factory businessman, he mentioned that for anyone to go on a public listing in M'sia, 50% of the company shares will have to go to the government. That is why, there are so many companies that do not want to go public listing to raise funds, because by doing so, they will have lost control of the company and will be reduced to doing the bidding of the government. This is anecdotal evidence, and has yet to be verified. But this might just be one of the reasons that Aident's listing never materialised and Adampak decided to acquire Aident.

On dilution of earnings post-consolidation with Aident
Mr Chua enlightened that the gross profit margin dilution is primarily due to a consolidation with Aident. For 1H07, profits from the associate company Aident were accounted for, but not the revenue. Whereas for 1H08, post-consolidation, the revenue is now included, hence this accounts for the decline.

On impact of inflation and cost increases
I further asked Mr Chua on the impact of inflation on Adampak's business. He gave a very straightforward reply that these are factors that are not within Adampak's control, and when raw material costs increases, Adampak just transfer the cost increases to the customer. This also meant that Adampak should be insulated from damaging effects on cost increases in raw material

On employees
Giving where credit is due, and striving to reduce employee turnover to a minimum

Adampak's management strongly believes in the principle of rewarding the employees for their efforts. This could probably explain why admin expenses generally rose in a 1:1 ratio to revenue, while maintaining a very strong ROE. And this principle has done Adampak a lot of good. Mr Chua shared that it's a well known fact that "Adampak has one of the lowest employee turnover rates around"

This is comforting, because with a HR policy that focuses on rewarding good managers for their efforts, I do not have to worry about excellent managers being poached by other companies.

On management succession planning
I asked him on the plans for management succession planning, he mentioned that this has already put in place - all the managers running different segments of the company. As for the question of importing foreign talent to helm the ship, like many Singapore companeies, Mr Chua said that the issue is not on foreign talent, but on finding the right man for the right job. He is confident that if he is not around, his managers can step up and run the company as well as he does.

On the board of directors
A strong representation of independent directors with experience across multiple industries

Mr Chua also shared that the representation of solid independent directors who hold concurrent appointments on other companies' board helped a lot. The executive management has received good advice from these people who are able to draw on their industry experience.

My final remarks
I think Adampak is a very good company, that is well worth the money I put in as investment. From a financial perspective: the intrinsic value is much higher than the current share price of S$0.22, and there's a very significant margin of safety. Moreover, the net asset value approximates S$0.18 cents per share. Their current significant exposure to the electronics industry will also mean that they may ride along the economic cycles, but I do not expect their ardent clients like HP and Fed-Ex to go out of business, so I am not really worried.

(A sidenote, I realised that HDD are dirt-cheap now. Now, don't you think that developing nations will be very hungry over the next few years for such low-cost storage?)

From a people perspective: it is well managed by a strong team, and this is validated by every single touch point I have with Adampak. From asking of AGM minutes, to requesting for a meetup with the CEO, to posing as a customer to test the sales staff competency, to warm customer service officers who gladly brought me around the factory floor to see a group of workers who are going about their tasks professionally. The team has not failed my expectations thus far. The management is financially prudent, and people like Mr Chua comes across as a forthcoming person an astute businessman.

Does it really bother me if there will be a recessionary year ahead and that electronics industry may be affected? Not at all. Even if the stock market shuts down for the next 12 months, I can continue to sleep well, knowing that the company will continue running and my money will be in good hands. I have done my due diligence to the best of my abilities, and the entire study tells me that the odds are in my favour. Let's wait to see if this gem will really shimmer and shine so brightly that the market cannot ignore anymore.

For Adampak, I have done more than sufficient as an analyst and part owner. It's time to move on to understand other businesses, while keeping this in view.

(P.S. Mr Chua was visibly impressed when he knew that all the written analyst reports I submitted to him came from an engineer. "Not many engineers I know write as well", he said. What a compliment! I guess I was just short of submitting my resume to seek employment in Adampak. :P )

August 16, 2008
Analysis of Adampak (Part II)
Comments on 1HFY08 Results Released on 15th August
(Updated as at 19 August 08, after a release of new information found in 1H08 briefing slides)

Revenue at US$28m for 1H08 as compared to earlier year (1H07) grew by 49%, cost of sales grew by 57.8%, reducing the gross profit margin by 4 percentage points (as compared to 1H07). Given an estimated inventory turnover ratio (cost of sales = US$19m / Inventory = US$7m) of 2.7, the raw material inventory (est. to take up 62% of all inventory, from FY07 AR) is not expected to last beyond 3 months. From this, it can be infered that inflationary pressure on material prices over the last 6 months have been factored into the rise in cost of sales.

(Effects of exchange rate between USD and SGD on profit margin are more fuzzy here to draw direct relations, so I shall not comment on it)

The administrative/distribution expenses rose in tandem (approx. 49%) with the revenue growth - this is reasonable from a retrospective point of view because historical trends have shown that Adampak's admin/distribution expenses growth correlates to revenue growth on a 1:1 ratio. Balance sheet is healthy with a current ratio of (46mil/12mil) of 3.8.

Comparatively, Brady, the global market leader for labelling, is doing much worse and has only registered a 1% growth in revenue for Apr 08 in the Asia-Pacific region (as compared to similar quarter in 2007), and 10% overall sales growth.

Revenue Structure
Examining the revenue structure reveals that Adampak has an inherent business vulnerability that must be addressed in the longer run. i.e. over-dependence on the HDD market. The management acknowledged that efforts must be made to expand their scope of business into other sectors like pharmaceuticals, telecommunications, etc. But it remains to be seen if Adampak can achieve diversification into other sectors and reduce its exposure in the HDD industry. For 1H08, 45% (compared to 49% in 1H07) of the revenue was derived from sales to HDD manufacturers like Seagate.

An overly focused revenue structure is a double edged sword: on one hand, the company is able to ride on the rapid expansion of the HDD industry; but on the other hand, it is definitely not healthy in the long run as Adampak's performance will be half (literally) dependent on the HDD industry.

For RFID sales, revenue registered a growth of 57% from US$0.5m to US$0.8m. By absolute figures, this is a modest figure but definitely not sluggish. While there are serious challenges for RFID to achieve a ubiquitous status, it will definitely come. Let's maintain a close watch on this.

Pre-Aident consolidation versus Post-Aident merger
From the 1H08 results briefing slides, if we assume that Aident was already fully merged with Adampak in 1H07 as a single entity, then compare the sales against that of 1H08 when they have fully merged, we see that sales to telecom products fell by 46% from US$4.2m to US$2.3m. Sales to other electronics sector shrunk by 6% from US$9.7m to US$9.1m. Are this as a result of slowing demand in the electronics products? Does this imply that there were some inherent inefficiencies in Aident's business that brought about the decision of the management to shut down their plant in Shanghai?

It is also noteworthy that it was mentioned that Adampak accrued the lower net profit margin due to the consolidation of Aident's results, as compared to the earlier year which was based on a 1 month equity accounting (i.e. apportioning the results of Aident by the percentage of Adampak's ownership). Such a statement necessarily implies that management acquired Aident, which is a company that is less profitable.

There are many questions that needs answers. But I believe that Adampak's management made this strategic acquisition for good reasons of expanding fast to rapidly penetrate Asian markets like Malaysia and China by leveraging on the established processes and infrastructure of Aident. And all the time, the management is fully aware of the need to restructure and streamline Aident's operations for greater efficiency.

A financially prudent and candid management
The management has also demonstrated financial prudence by curtailing their purchases on plant and equipment (1H08 US$0.2m compared to 1H07 US$1.2m) to conserve cash holdings, brace for a slowdown in global demand, and prevent built up of excess production capacity.

What consistently struck me in my entire analysis was the candid nature of the management about areas of their business that was not doing so well.

Final remarks
Adampak has so far done extremely well in light of the inflationary pressures and slowdown in global demand. Profit margins may be slightly squeezed in view of rough times ahead, but given an efficient cost structure and strong balance sheet, the company will definitely be able to continue to inch forward and expand their market share. Also, management and the business development personnel must continue to aggressively expand sales to other industry sectors to minimise their risk exposure.

August 9, 2008
Analysis of Adampak (Part I)
Over the last few days, I applied Buffett principles and Fisher's concept of 'scuttlebutt' to deeply understand my investment holdings. So I went and approached two companies Adampak and Zephyr as a potential client. By conversing with various senior executives in both companies, I managed to glean a lot of insights that are otherwise not found on financial reports or the internet. For the lay reader, from this blog entry you will be able to gain a much better understanding into the business of labelling and RFIDs.

1. Overview
Products and Services
Adampak products and services are in the area of manufacturing labels for any products that requires some form of labeling. Their labels range from serialized barcodes, generic paste-on labels, tamper-proof labels, labels and seals for use in electronic circuit boards (clean-room 100 and 1000 requirements), insertion of Radio Frequency Identification Tags (RFID) onto labels.

In recent years, Adampak acquired 100% stake in Aident, and hence expanded its business laterally into precision die-cut components, as well as enlarged the manufacturing base to reach into Malaysia.

Industry analysis
Product labels have grown to become ubiquitous and indispensable in our daily lives. And as human’s insatiable need for more products grow indefinitely, the demand for labels will also grow in pace. The global market size for labels is estimated to be worth US$2.0 billion in terms of sales[1]

From a manufacturing perspective, labeling services are critical in the entire product value chain. Companies rely heavily on the labeling services to firstly, perform effective inventory management (using barcodes or RFID), secondly, to communicate key information visually (e.g. from manufacturer to distributor to suppliers to front line sales).

Dividing the pie for service redundancy
In view of the criticality in the entire value chain, companies are cautious in awarding their contracts to the label manufacturers. They will normally adopt a policy distributing the required number of labels amongst the shortlisted manufacturers. This prevents a single point of failure in the entire value chain by building in a layer of service redundancy. For instance, say HP requires 1,000,000 labels for their entire series of printers, if there are three competitors, they will split the pie accordingly and award each label manufacturer a part of the entire contract. Should one label manufacturer’s operations suspend, the customers will be able to fall back on another substituting firm and prevent a catastrophic disruption of the product value chain.

Market Dominance and Barriers to Entry
The prior paragraph implies that the industry will never allow the creation of a monopoly. One manufacturer may be able to eat a majority of the pie, but it will never be able to swallow it complete; in the longer run, many will perish and at the same time, none will be able to achieve complete market dominance; the competition will always taper out to an equilibrium comprising several key players in the industry.

At first glance, the labeling business appears to be a commodity-like industry, with low barriers to entry for potential competitors. But a closer look reveals otherwise. For those companies that have an impressive clientele of most global clients, with 30 to 40 years of industry experience, with consistent delivery of high quality products – these are invisible barriers to entry. For instance, HP will naturally be disinclined to switch to a new China label manufacturer entrant that has not yet been tried tested and proven, and avoid any risk of their product labels fading or falling off at the consumer’s end; they will prefer to stay with the reliable incumbents like Adampak. In addition, for any competitor to take on Adampak in terms of being the lowest cost producer, it must be able to achieve a significant scale of operation to derive economies of scales. It is also quite apparent that extensive experience is required in terms of running a labeling business and managing the technicalities of operations.

As long as the incumbents continue to consistently deliver quality labels at the lowest possible cost, I do not see why product companies like HP will take a risk and perform a switch on such critical services.

Exposure to economic cycles of boom and bust
Adampak and Zephyr currently derive a majority of their sales from pharmaceuticals, electronics, hard drives, telecommunication products. Therefore their businesses are inadvertently driven by demand in the various sectors. While they are making efforts to expand into other industries like 3rd Party Logistics, it will be inadvertent that their sales and profits will depend on the expansion and contraction of the various sectors during economic cycles of boom of bust.

Competitor Analysis: History of the Three Kingdoms
For industrial applications, Adampak, Zephyr and Brady – all these three companies hail as the giants who take up majority of the global pie of labeling services. In the South-East-Asia region, Adampak & Zephyr hail as the two industry leaders. This is based on the fact that their clientele include an impressive list of MNCs like HP, Fed-Ex, DHL, Merck, Seagate, Maxtor, etc. etc. While on the international arena, all three of them compete for contracts from the big companies. There are other labelers, but judging at the Adampak and Brady’s ability to grow sales so consistently and rapidly over the last few years, it does seem that they are gradually scalping sales from the smaller competitors.

Zephyr (pronounced as Zef-fee) is a privately held company based in Singapore. It has 2 factories in Malaysia and 1 in Singapore, as compared to Adampak’s 8 multi-national factories spread over Philippines, China, Thailand, Malaysia and Singapore. Sources from industry insiders revealed that Adampak started out as a sub-contractor of Zephyr. When Zephyr is not able to fully satisfy the sales due to production capacity, the spillover deals went to Adampak. Adampak subsequently cut the umbilical cord, moved forward and went public in 2002. Adampak took the bold move and seized the opportunity to launch into China, while at the same time, Zephyr was cautious of operations in China, so it stayed within the confines of Singapore and Malaysia.

Now, Brady is a US based company with a very extensive range of label services. It has a global outreach with offices and factories spread across Europe, America and Asia. For FY07, it has achieved sales of US$1.3 billion, with 25% of the sales of some US$520m from Asia Pacific countries. In recent years, it has been trying to make attempts to secure its foothold in the Asian region. To break into the Asian markets, Brady took a move to setup factories and offices in Asia, and once attempted mounted a takeover bid on Zephyr.

Competitors Analysis: Financials
From comparisons from FY06 and FY07 annual reports, Zephyr’s revenue dipped slightly by 5% from S$44m to S$42m[2], while Adampak has been fast soaring ahead with revenues growing by 50% from US$31.8m to US$47.8m. Zephyr’s profit margin for FY07 is 26.7%, while Adampak’s gross profit margin is 33%.

In addition, profit/sales ratio for Zephyr is 13.3%, Brady’s is 8%, and Adampak leads with a profit/sales ratio of 15%. In terms of efficiency in cost structure, Adampak emerges as the clear winner here. In terms of Return on Assets (as a measure of profit per dollar of asset), Zephyr has ROA of 13.4%, Brady's is 6%, Adampak leads the pack with an ROA of 16%.

Comparatively in terms of growth, Zephyr is languishing (-5% growth for FY07, and only a total 12% growth since 2003 from then S$39m to FY07 S$44m) as it watches Adampak rapidly expand into Asian markets. If Adampak can continue to sustain its current rate of growth, it is only a matter of time that Adampak will overtake Zephyr to become the South-East Asia’s industry leader. Adampak is well anchored in the Asian markets but the company faces stiff challenges from the goliath incumbent Brady. Given Adampak’s well established network and factories well positioned in South East Asia, I do not rule out a possibility that Brady will extend a takeover bid for Adampak for it to leapfrog and expand its presence in Asian countries.

Areas of Improvement for Adampak
For Adampak to continue to maintain its edge in this industry, efforts must be continually made to leverage on technology to reduce costs and streamline operations. What is observed from a ground tour is that there are many areas that can be further improved with the aid of technology. For example, quality checks on barcodes are performed to 100% by manual visual checks, and this can be expedited by incorporating computerized image recognition technology to replace labour and speed up such checks. This is perhaps just one of the many possible areas of improvements. In addition, instead of a manufacturer offering labeling services, Adampak can consider forging strong relationships with partner companies in related industries to provide customized turnkey solutions for customers. i.e. Adampak can become the customer’s single point of contact from setting up of a label system to printing of labels.

Adampak's business strategy
It is in my opinion that Adampak adopts a strategy that (1) maintains a niche specialization in label manufacturing, (2) leverage on resources in developing nations to reduce production and labour costs, and (3) grows business aggressively in Asian regions by establishing a localised presence.

Challenges of Industry and growth drivers
It was several years ago that RFID was slated as the next wave in 3rd Party Logistics. However, RFID technology faces immense challenges to attain a status that is as ubiquitous as the barcode. Firstly, cost: the transponders are highly expensive, and firms think twice on adoption of such technology for their inventory management needs. Insiders revealed that current RFID technology costs about 10 times more compared to barcode. Secondly, lack of a common standard. Currently, there is a lack of a common standard in production and RFID technology is still largely proprietary as firms with the know-how closely guard the secrets. Finding substitutes are hard and practically non-existent at the moment. Without readily available substitutes to create service redundancy, the take up rate of RFID is consequently reduced. Liberalization and wide adoption of RFID technology by companies for 3rd Party logistics remains to be seen.

Final Remarks
Quotes from Brady’s FY07 report
“Fiscal 2007 was marked by challenges and progress for Brady. While sales grew 34 percent over last year, we were disappointed by a 5 percent increase in net income, which fell well short of our expectations. This was primarily driven by challenges we faced in our OEM markets, with increased pricing pressure from our customers, a loss of focus due to major acquisition integration efforts and some loss of market share. We responded quickly to correct our cost structure, refocus our OEM sales force in Asia and integrate recent acquisitions.”

Was Brady’s CEO referring to a loss of market share to up and rising competitors like Adampak? I would think so. The deeper I analyze the business; the more I am convinced that Adampak is well poised to become the next Unisteel of labels.

2. Management Quality
Is the management of (a) an unquestionable integrity, (b) holds a vested interest, (c) highly competent and (d) shareholder oriented?

Vested Interest
The executive management has a significant vested interest in the company. Executive Director Mr Anthony Tay Song Seng holds a 32% stake in the company with 85 mil shares, while CEO Mr Chua Cheng Song holds a 2% stake with 6.1 mil shares. In addition, in recent months, the Executive Director has steadily been increasing his holdings through open market purchase. As a minority shareholder, the above facts provide immense confidence that the management will be acting in the best interests of the shareholder.

Management stability & integrity
There is also great stability in the management as there have been no changes in the key appointment holders for the last 7 years of listings. This is a good indication of a good and united leadership core. Management has thus far been forthcoming and candid – be it about the challenges the company faces, or the quality of earnings in light of rough times ahead. Management integrity is also spotless, with no clear signs of inconsistencies.

Management competency
The executive director Mr Anthony Tay Song Seng is the founder of the company with more than 25 years of experience in the industry. CEO Mr Chua has been with the company for a period of 10 years. At the manager level, at least 50% of the appointment holders had experience level ranging from 10 years to 20 years in the industry. The independent directors comprise of two chartered accountants, Mr Goh Siang Khin and Mr Lee Joo Hai, and one lawyer Mr Teo Kiang Kok. In addition, interestingly, both independent directors served a stint in Unisteel, and hence they will definitely be able to add value to Adampak from their experience in Unisteel. All of them have an illustrious professional track record in either accountancy or the law practice. This is a very strong representation, and enhances the shareholder confidence in the accuracy and transparency of the financial statements.

Shareholder oriented
Adampak has consistently and unfailingly made good its promise to share the wealth generated from its operations with the shareholders. Although there’s no formal dividend policy, Adampak has distributed approx. 30% of profits to all shareholders for the last few years. This is not expected to change in the near future as the management will likely remain in operation.

My Impression of Adampak’s staff
I went into Adampak posing as a potential customer. I was greeted with a forthcoming Customer Service Manager, and happened to bump into the Executive Director Anthony dressed in tee-shirt and jeans just stepping out from the production floor, probably after doing his ground walkabout. He gave me the first impression as a very down-to-earth and hands on person who knows his stuff. A casual walkabout at the production floor reveals that several technicians are highly experienced with over 20 years of service in this industry.

3. Business Fundamentals & Valuation
Adampak has excellent business fundamentals. For FY2007, using Owner’s Earnings (3.242 mil) / Share Capital (15.5 mil) ROE = 20.9%. For FY2006, ROE is 25.6%. It has a high current ratio of 4, and runs on low debt to finance its growth. The Net Tangible Asset Value as at FY07 is US$0.14, or S$0.19. Using the FY07 operating cashflow of S$0.0275, and a projected growth rate of 15%, assuming Adampak has no terminal value and stays in business for 7 years, Adampak’s intrinsic value is estimated to be S$0.38, which is actually a very conservative estimate of intrinsic value. Take this value and compare to current share price, there is a significant margin of safety of 1.57.

[1] US$2.0 billion is a figure that is derived based on Brady (market leader) Annual Report sales of US$1.3b. A good ballpark estimate is that Brady has cornered some 60~70% of the global market share, while the rest went to smaller labeling manufacturers.