Powermatic Data (SGX:BCY) – The Right Place at the Right Time

When I first invested in Powermatic Data, what I saw was a company with huge margin of safety with its cash hoard and properties. If you ask me then, what does it do, I would probably say “they have something to do with modems”.

That was almost 3 years ago.

Today, Powermatic Data is a specialist in wireless connectivity and has the know-how in wireless technology. This has allowed them to provide both hardware and software services to many multinational corporations around the globe.

1HFY20 Results

Income Statement

For this half year, total revenue for 1HFY2020 was S$14.259 million as compared to S$8.709 million generated in 1HFY2019, representing a 64% increase year-on-year. Their management said that aside from their regular customers, new customers also integrated their products for their one-off projects.

This could mean that we might not get a repeat of such stellar results in 2H20. Then again, the new customers coming in is always good news and hopefully turn into repeat customers. I would not read too much into this and shall assume no increase in revenue for 2H yoy for now.

Gross margins improved from 45% to 55%. The improvement in gross profit margin was due to sales mix difference

From there, PBIT grew 113% to S$6.64mil. Yup it’s 113%, not 11.3%.

Cashflows

Overall, cashflow seems healthy, the higher profits have led to higher increase in operating cashflow.

There were able to utilize the free cash flow and not debt to invest in PPE for their new factory in Malaysia. This resulted in an increase in cash holdings by S$1.5mil.

Balance Sheet

Again, not much change in their balance sheet. The 2 important attributes; huge cash holdings and zero debt, are still there.

Cash per share is around $0.96.

Management Commentary

The management stated that they are riding on the wave of wireless connectivity which offers huge potential for Powermatic Data to grow its business.

An important point that they noted is that their products have been gaining recognition in the wireless connectivity products industry.

Lastly, production capacity is set to increase in the coming months and that could mean that they are ready to meet higher demand of their goods and services.

Review of Capital Structure

On 31 Oct 2019, the management announced that they are reviewing their capital structure and there might be a potential capital reduction which might involve their properties at No7 and 9 Harrison Road.

No.7&9 Harrison Road, taken from Google Maps

I believe that this is a very good way to reward shareholders. If you look at their cash hoard, 24% of it, or S$8.3mil, is placed in fixed deposits with more than 3 months maturity (I would call it the money that they keep under their bed). They have alot more on hand compared to the cash they require to keep the business running and it would be a very good idea to give some back to the shareholders.

As for their property, it is stated in their balance sheet that the property is around S$17mil. However, this is booked at cost price. Their recent valuation of the property has placed a price of around S$31.5mil, almost doubling the value stated in the balance sheet.

Taken from 2019 annual report

I’m going to make any guesses on how much capital reduction, if any, they are going to make but hopefully, the capital structure review would somehow come up with a way to unlock the value of this property.

Valuation

Assuming that earnings for 2H20 is the same as 2H19, Forward PE stands at around 9.1x with EPS at around $0.28.

Cash per share is about $0.96, their property with the most recent valuation is about $0.90 per share. If we deduct these from the current share price of $2.55, the forward PE would be around 2.46x, which is extremely undervalued.

If we value its business at a PE of 8x, together with its cash and properties, the fair value of Powermatic Data would be around $4.12, representing a 60% upside to its current price.

For me, I would give a 20% discount to its fair value and my target price would be $3.30 instead. Of course, my assumption is their EPS for 2H20 is the same as 2H19 and any deviation could change my fair value.

Conclusion

Looking at recent results and positive outlook, I stay vested in this company and will be looking to increase my holdings should the opportunity comes (eg when Trump tweets).

Image result for calvin and hobbes right place and the right time

The comic strip above kind of explains my investment thesis in Powermatic Data. Staying vested in them, getting paid dividends (current dividend yield is 3.16%) and realizing the profits of the investment when the right moment comes.

If you would like a more in depth study of this company, you could look at my previous posts below;

https://themosspiglets.com/2019/04/21/powermatic-data-systems-limited-sgx-bcy-believing-in-the-future-of-wireless-connectivity/

https://themosspiglets.com/2019/05/27/powermatic-data-sgxbcy-full-year-results-2019/

Note: The Moss Piglet is vested in Powermatic Data with an average price of $1.45.

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