Zicom Group $ZGL, a Misunderstood GARP stock

First off, I’d like to thank Joe at WalueinvestingWorld for alerting me to this idea, his site provides a great source of links/articles from around the web.

In my opinion, Zicom Group at around $0.20 offers investors a low risk and deeply undervalued exposure to a number of “GDP plus” growing end markets with a conservative and proven founding family operating the business. Whilst we wait for the market to re-evaluate the prospects of this business and it to trade at a premium to book value, like it deserves, we get paid a 5% plus dividend yield and allow management to opportunistically buy back shares to increase our ownership. The stock currently trades at a 20% plus discount to Net Tangible Assets.

Zicom has 3 main Divisions comprising the vast majority of revenues and profits.

1)      Offshore Marine Oil & Gas (circa 40% of revenues)

2)      Construction (circa 40% of revenues)

3)      Precision Engineering & Automation (circa 15-20% of revenues)


The Divisions

Offshore Marine Oil & Gas (circa 40% of revenues)

Zicom is one of the world’s leading manufacturers of high spec, heavy duty winches and deck machinery for use on large marine oil & gas vessels. They supply to shipbuilders and ship owners, some of their winches can weigh up to 300 tons and therefore are very large pieces of kit! The key variable for long term winch demand is deep sea oil & gas exploration.

Orders for deck machinery products lag orders for the production of new rigs or vessels by about 12-18 months, this means that the current weak orders still reflects a bit of a hangover from the implosion of demand during the financial crisis. The order book still looks weak at only SGD $42m, or around half of what it was a year ago. We might be hopeful that in 12 months time the order book looks much better.

The main competitor to Zicom in the manufacturer of winches is the UK’s Rolls Royce, obviously a giant in comparison which has its pros and cons. This is clearly a non core business for Rolls Royce and this perhaps allows Zicom to get an edge on customer relations/meeting client needs.

Demand for offshore products in general is likely to be relatively robust above $80 per barrel. The oversupply of vessels from the boom/speculation era and the subsequent slump is starting to clear and E&P companies are starting to spend on projects again.

In the 2011 Directors Report there is reference to a resurgence of demand for offshore rigs which they say has resulted in a “gradual build up” in enquiries which they expect to gain momentum in the next 12 months.


The “Offshore” Marine Oil & Gas division also designs, builds and installs “onshore” turnkey gas processing plants and gas flow regulation systems across Asia. This is a relatively new line of business and is still growing, orders are lumpy and can have a large affect on numbers. There is a goal to grow this part of the business so that is equal with the winch business in doing around SGD $60m per annum revenue.

Zicom supplies process plants for the recovery of gas from refineries. This captures the gas that is normally flared off as part of the process of extraction, separates it and sends it to the refinery. Each plant has a cost of around SGD $10m so they are substantial orders. Alas, the current natural gas price probably is a disincentive for these projects but they still could have a payback period of under 5 years.

As an example of the group’s long term focus and using their robust balance sheet in their favour, they used weakness in May 2008 to deploy SGD $5m into the building of a new factory in Singapore for this division to position it better for the future.

There is a further growth avenue available in “Remotely Operated Vehicles” which are increasingly required for offshore deepwater drilling. The construction division manufactures the frame and the offshore division tailors it to customer spec.


Construction (circa 40% of revenues)

I view the Construction segment as the boring, dependable part of the business. The core of this division is the manufacture of concrete mixer trucks for which they have a dominant 70-80% market share in both Australia and Singapore.

The secondary part of the construction division is the “foundation equipment” business which hires equipment like large vibratory or piling hammers or boring machines. Zicom owns the largest vibratory hammer in SE Asia weighing in at 42 tons!

The division has been revolutionised by the opening of a new production facility in Thailand which consolidates their Australian and Asian facilities and which allows them to increase efficiencies dramatically helping margins. The new facility was a SGD 10m investment to improve the long term prospects of the business and this is already starting to show in margins.  Concrete mixer and foundation equipment demand is of course quite cyclical due to a dependence on construction activity but their geographical diversity and market share helps.

The Australian subsidiary has further diversified into the distribution of gas generators and is looking into waste digesters and biogas generators.


Precision Engineering & Automation (circa 15-20% of revenues)

This division is a specialist equipment manufacturer and niche engineering service provider to customers who require a high degree of specification in their goods, ranging from inkjet cartridges to fully automated production lines to biomedical equipment.


The precision engineering division secured “ISO 13485” accreditation in 2010 which means they can now manufacture entire medical devices in house rather than only being able to make component parts. This accreditation also marks them out as a high quality operator. This competitive advantage has a margin and earnings impact due to pricing power too. The aim here is for the business to partner in co-designing biomedical devices and to make sure that the manufacturing is all done in house too.

Zicom has focused on using its scale to its advantage, focusing on niches and only accepting business that is likely to be profitable and ideally recurring so that a relationship can be built with the customer and revenues become more predictable.

In the last 2 years the group has made a substantial commitment to this part of the group by doubling the floor space of their factory and by making three strategic investments in start up companies which possess “disruptive technologies” which can be manufactured and monetized through this division’s expertise. Zicom has targeted “high valued added synergistic products” that have the potential to revolutionize their industries, these are clearly high risk/high reward targeted investments in areas close to their existing operating circle of competence. Any one of these products being a “hit” could result in exponential earnings growth and they already have the factory capacity to grow into.


3 Shots at a Home Run within Precision Engineering

1)      BioBot Surgical (46% ownership for SGD $3.5m)

This is a surgical robot for taking prostate samples for biopsy. This robot has been proven to increase sample accuracy and minimises patient embarrassment and invasion.  A study in Singapore’s largest hospital showed that over

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