Armstrong Industrial Corporation Limited – Possible Takeover?
Armstrong Industrial was one of the clients I served when I was working at my previous company. The impression I got while serving them was that Armstrong are a very cost conscious company and their office building looked rather old, which is usually a good sign for shareholders. Practicing what was taught in Millionaire Investor, I decided to analyze this company as it was within my circle of competence.
Armstrong Industrial is a foam and rubber components manufacturer specializing in noise and vibration reduction for the automotive and electronics industries. The company through its subsidiaries, manufactures and markets precision die-cut, rubber moulding, vacuum and heat press moulding components. The manufacturing of these components is a highly specialized and niche area, hence they can command high margins. Its business segments comprise of 4 segments including data storage, office automation, consumer electronics and automotive industries. Their top 3 biggest contribution to sales based on business segment is from Automotive (39.2%), Consumer Electronics (29.9%) and Data Storage (19.9%). Their geographical top contribution to sales are China (30.4%), Thailand (26.3%) and Singapore (25.2%). The company primarily operates in Singapore, Malaysia, Indonesia, Vietnam, Thailand and China.
Personally I think that the growth of Armstrong comes from their automotive segment as many European car manufacturers are expanding into China. The automotive industry works like this: When a particular part is chosen and specified by the car company, they are “locked in” with the manufacturer who makes the part. This presents a high barrier to entry for their competitors.
A quick look at their numbers shows that revenue and profits have been consistent over the past 5 years. Armstrong has a decent balance sheet with a cash position of $31.6 million (total equity of $108.6 million). The balance sheet also shows total borrowings of $19.8 million which gives them net cash of $10.1 million. Their revenue is $216.2 million with profit to shareholders at $11.4 million. Based on the closing price on 26 June 2013 of $0.335, their market cap is about $170.3 million. The P/E ratio is 22.
My own estimate of Armstrong’s intrinsic value is $0.47. At the current share price of $0.335, the margin of safety will be around 40% (we bought below $0.335, which would give us a higher margin of safety). It seems that Armstrong also believes that their company is undervalued as they have been executing share buybacks between 6 June 2011 to 7 June 2012 at the price range of $0.235 to $0.32.
Recently (20 June 2013) , Armstrong received a non-binding indicative proposal from a consortium involving the major shareholder of the company that may result in the delisting of the company. The terms are still being negotiated but if the deal goes through, we could see Armstrong shares being bought over at a premium. It seems that this private consortium sees the value in Armstrong which is why they are exploring this takeover. However, Armstrong has also warned that there have been speculations in the past related to the shareholder’s equity interest, which did not result in any transaction or agreement.
Either way, I am happy with my investment. If the deal goes through, I stand to make a profit because of the takeover. If not, I believe Armstrong’s shares are currently undervalued and only stand to rise in due time. As always, there are no guarantees with investing and all of this is purely my opinion. Please do your own research and make your own decisions when you invest. Happy investing!
This is NOT a recommendation to buy or sell any of the above mentioned securities. This case study is for educational purposes only. Always do your own research and practise independent thinking!Earning Disclaimer
“Please note that the material here is provided to you for general information and illustrative purposes only, or as descriptive case studies on how our value-investing principles may be applied. It is not intended to be and should not be construed as any form of general or specific financial advice. For the avoidance of doubt, we do not recommend or provide opinions on how or what you should or should not be investing in, and you should always do your own research and independent assessment before making any investment decisions, taking into account your own specific circumstances. If you require any financial advice on investments or any other financial matters, please consult the relevant professional financial advisers.”