At first glance, this company has a very solid balance sheet and their business margins are at double digits and it also has a very earnings yield at around 17%. Moving forward, I also believe that their core business, which is in wireless connectivity, will ride onto the growing trend of 5G telco networks and Internet of Things (IOT), which makes this company a very compelling investment opportunity.
Powermatic Data Systems Limited (PDS) (SGX: BCY) is a Singapore based company operates in communication equipment business. Through its subsidiaries, it is engaged in manufacturing, sale, marketing and distribution of wireless components and products which is also the primary revenue generation source. In addition, the company is also involved in property and corporate holding segments. The Property segment comprises managing the investment properties, and Corporate holding and others are involved in group-level corporate services. Geographically the firm has a presence in Singapore, Europe, Asia, USA, and others.
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Business Overview
Wireless Connectivity Business
In PDS’s wireless connectivity business segment, they offer wireless solutions to customers with added customisation and software capabilities if required.
In 2014, through their wholly owned subsidiary Compex Systems Pte. Ltd, they partnered with their main technology partner Qualcomm Atheros Inc, in becoming one of their Authorized Design Centres (ADC). Qualcomm Atheros Inc, is a world leader in Wireless and Mobile Technology. This is Qualcomm Atheros’ first and only ADC in East and South East Asia. Since then, Compex has also been growing its engineering service business. This business offers their core skills in wireless hardware and software design and competitive small batch manufacturing to enable customers to develop their ideas into real products. In other words, they can be involved from ideas to production, as well as in any part of the development/production chain. This high value-add nature of this business has helped them improved their gross margins from 30% in 2014 to 45% in 2018.
In addition, they have a growing brand recognition of their products which have gained greater market acceptance and consequently achieving greater market share in key markets. This versatile business model and the high value add business has given them added advantage over their competitors.
Non-Core Investments
PDS owns 2 adjoining 6-storey semi-detached industrial buildings located at 7 & 9 Harrison Road. This freehold property is currently 90% leased out, with them keeping 10% for their own operations.
They also have investments in equity shares in technology corporations in Thailand and United States of America.
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Management Overview
Profile of Directors
Chen Mun – Chairman & CEO
Dr Chen Mun is the Chairman and Chief Executive Officer of the Group. He is also the founder of Powermatic Data Systems Limited and is responsible for spearheading the Company’s Research and Development programs as well as growth strategies of the Group.
Yee Lat Shing, Tom – Independent Director and Chairman of Audit Committee
Mr Yee is a Singapore Chartered Accountant and was a partner of Ernst & Young, an international accounting firm, from 1974 to 1989. He has more than 35 years of experience in the field of accounting and auditing and extensive experience in handling major audit assignments of public listed and private companies in various industries, including insurance, manufacturing and retailing.
Katherine Ang Bee Yan – Executive Director
Ms Katherine Ang Bee Yan joined Compex Systems Pte Ltd, a whollyowned subsidiary of Powermatic Data Systems Limited in 2003 as Director of Sales & Marketing and Operations. She is currently the General Manager of Compex Systems Pte Ltd. She manages both the operations in Singapore and China.
Lye Kin Mun – Independent Director and Chairman of Nominating Committee
Dr Lye Kin Mun holds a B.Sc. with distinction from the University of Alberta, Canada, in 1974, M.Eng. from the University of Singapore in 1979 and Ph.D. from the University of Hawaii at Manoa, U.S.A. in 1984 all in electrical engineering and was a Colombo Plan Scholar from 1970-74. He is currently Chief Risk Officer, Agency for Science, Technology and Research (A*STAR). He was Executive Director of the Institute for Infocomm Research, (A*STAR), and has been Director of the Centre for Wireless Communications, National University of Singapore from 1993 to 2002.
David Tan Chao Hsiung – Independent Director and Chairman of Remuneration Committee
David Tan has over 20 years of senior management experience in the banking and finance industry and had held positions in both local and foreign financial institutions. He is also a Non Executive and Lead Independent Director of Mun Siong Engineering Limited.
Overall, PDS is a very lean company. The Group does not have a CFO and its finances are handled by its Group Finance Manager. However, I would like to note that founder and CEO Dr Chen is approaching 70 years of age. As of now, there is no indication of any succession plan.
Remuneration
From the information extracted from the Fy2018 annual report, the annual aggregate amount of the total remuneration paid to both directors and the top 5 key personnel is about $2mil. This amounts to about 37% of Profit before Interest & Tax. This is relatively high if you compare to their income statement but on a whole, remuneration of CEOs and directors looks quite fair.
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Financial Performance
Recent Results
For FY2018, overall revenue grew 5% year-on-year. Gross profit margin improved from 44.6% in FY2017 to 50.4% in FY2018. Profit before tax came in 13% higher than previous year. The improvement is due to the moderate but steady growth of its wireless connectivity business which led to the increase in demand of their products and solutions and thus, increasing their service income. Cash and cash equivalent increased from S$25.9mil to S$27.3mil. Earnings per share rose 0.97 cents from 11.97 cents to 12.94 cents. Net Asset per share stands at $1.57 per share. A first and final dividend of 5 cents and a special dividend of 2 cents was proposed, which represents 45% of the Group’s profit before tax for FY2018. Overall, it was a decent FY2018 for PDS.
Income Statement
Taking a look at their financials over the past 5 years, revenue has been steady at around S$15mil. What stands out from the table is that their Profit before tax has been growing at around 10% CAGR for the past 5 years. They have increased their dividend by 2 cents from 2017 but their dividend payout ratio is still maintained at around 50%, which says a lot about their strong financial performance especially for the past 2 years. Current net asset value taking into account the fair value of their freehold property is $1.98, which means their current share price is at 19% discount to their NAV. Staff count has remained steady but pretax profit per employee has risen over the years.
For the past 5 years, Gross margin has been increasing from 30% to 45%. This is a testament to their ability to provide not only standard hardware but also customised hardware cum software designs as well as total integrated solutions which have enabled them to enjoy these gross profit margins. Net margin higher than 10% are generally considered very well managed business.
As mentioned earlier, EPS has grown at a CAGR of 10%, mainly due to their improvement in their bottomline. As of now, PDS has limited revenue growth but this is partly due to them scaling down their low margin distribution business while growing their high margin wireless connectivity segment. This can be clearly seen in the graph below that they are experiencing growth in their wireless connectivity segment.
Balance Sheet
Taking a look at their balance sheet, their cash and cash equivalent stands at $0.78 per share, which is about 48% of current their share price. They are also a net debt company. This provides a solid safety margin.
The accounts payables is always higher than their receivables. This suggests that they are collecting more promptly from their customers. Higher payables means that the company is able to take credit terms instead of paying up front for services and supplies.
Cash Flow Statement
PDS has little CAPEX compared to their cash flow generation. This also shows that this business has limited capex needs as their competitive strength lies in hardware and software design of radio frequency-related products. The FCF is also on an increasing trend. This has also led to them having an yoy increase in their cash hoard as mentioned above.
Ratios
PDS’s ROE and ROA are on an increasing trend as they are experiencing improvement in their margins. Currently ROE stands at 10.2 which is quite healthy.
A high days payable shows that PDS has very huge bargaining power, where it could extend their payable days to over 90. This is because credit terms are usually 30-90days. Low sales outstanding/receivables days show that they are getting paid on time for their services. There are times where PDS experience a negative cash conversion cycle, meaning it is generating revenue from customers before it has to pay the suppliers for inventory etc, etc. All this bodes well for PDS’s business model.
PDS has a high inventory days shows they have a long lead time to develop their products. Inventory to revenue is very consistent.
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Industry Outlook
The introduction of 5G telecommunication network will further stimulate the market growth of smart phones and other mobile devices. New generation of applications will be introduced that take advantage of the greatly increased bandwidth and network speed, creating greater demand on network access. Such mobile devices are usually dual capable, accessing the Internet through either paid services such as 5G and 4G, or “free” wireless that bridges to land based networks at a fraction of the cost.
The new generation of wireless access points will have to handle not only greatly increased throughput but also many fold increases in number of client devices along with a greater user expectation on quality of connection and coverage.
PDS’s research and development are constantly developing new proprietary products with distinct and creative features to meet a fast growing market that places stringent demand on product quality and performance. The vision of future connectivity – with virtually unlimited number of things that can be connected will spur growth for our core wireless connectivity products business.
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Conclusion
I believe that Powermatic Data Systems is a good investment opportunity due to the 3 reasons below:
1) Growth Prospects
I feel that the growth potential of wireless connectivity is a boon to their core business. Their business strategy of providing value-add service to customers and having intellectual property content have led to very high gross margins and it should be sustainable in the future.
2) Strong Balance Sheet
PDS is in net cash position of about 48% of their market cap and they have no long term liabilities or debt. The fair value of their investment property is also not reflected in their balance sheet. This provides a strong safety margin for investors at the current price.
3) Dividend Track Record
The company has been consistently paying out a dividend of $0.05 per share despite not having a formal dividend policy. For FY2017 and FY2018, they have increased their dividend by $0.02. Current dividend yield is at 4.3%.
At current price of S$1.62, PDS has a PE ratio of 12.5, or PE ratio of 6.5 ex-cash. In my opinion, the current price is quite cheap for such a good business and it has a very large margin of safety with its cash hoard and property.
Note: Moss Piglet is currently vested with an average price of $1.45
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