Summary
- Teckwah Industrial Corporation (SGX:561) trades at 30% discount to tangible book value and EV/EBIT of 6.83.
- Part of the performance decline in FY18 is due to the ongoing trade war.
- The company has been generating consistent free cash flow with current dividend yield of 3.3%.
- Teckwah is implementing a transformation plan which will provide near term and long term catalysts including increased efficiency, expense reductions and new areas of growth.
Started as a plain packaging box producer in 1968, Teckwah has since evolved into a service oriented organisation where they provide packaging and logistics solutions to their customers.
Operating in a highly competitive print business, Teckwah has been reinventing their business for the past 8 years. Even so, they have been generating free cash flow consistently and has been reinvesting their excess cash to upgrade its capabilities to better serve their customers.
Teckwah is currently executing its next stage of transformation of its business model to ready itself for “Industry 4.0”. Hence, I feel that it is important to observe how the management leverage on digital technologies and what are the initiatives they will undertake to transform Teckwah into a SMART organisation.
Business Overview
Teckwah’s services are segmented into Print-Related Business, Non-Print Related Business and Llifestyle Business.
Print Related Business
The Print Related Business can be further segmented into 3 sub-groups, namely, Printing and Packaging, Turnkey Kitting & Co-packing and Digital Solutions.
Printing and Packaging – Teckwah offers a myriad of options for your printing solutions, from courseware and manuals to corrugated boards and labels. As for packaging, Teckwah produces packaging boxes die-cut to their customers’ desired designs and dimensions.
Turnkey Kitting & Co-packing – Teckwah has the expertise to handle multiple, country-specific product combinations and volume requirements. Operations are also scalable and replicable to support the manufacturing from one to multiple sites. This shows their flexibility to adapt to the business model required.
Digital Solutions – Teckwah has a Creative & Design team that can assist their customers to create aesthetic yet effective packaging that effectively communicate branding to their target markets.
Non-Print Related Business
Teckwah’s Non-Print Related Business is a logistics business that offers demand chain solutions such as last mile delivery and storage options
A standout aspect in this business is their Aftermarket Logisitics. Teckwah offers logistics solutions for handling of returned goods and asset recovery such as repair and refurbishment. An example provided by Teckwah is the data wipe and clean-up of demo equipment that was loaned to their customer’s clients interested to have a “test drive”.
From designing and manufacturing of the packaging to delivery and then after-market services, Teckwah’s all-in-one packaging experience has allowed them to strengthen their value proposition to their customers.
Profoto
In 2019, Teckwah acquired Profoto, a commercial printing lab targeting the retail landscape. Besides printing of advertisements, Profoto also fabricate props, window display and events set-up. Similar to Teckwah, Profoto aims to be a “One Stop Solution” for commercial photographic printing.
Board of Management
Chairman and Managing Director (second from right) – Mr Thomas Chua Kee Seng
Started from the bottom now we’re here~ The eldest son of Teckwah’s founder Mr Chua Seng Tek, Mr Thomas joined Teckwah in May 1979 as a Management Trainee. He worked his way up the organisation hierarchy and was eventually promoted to Managing Director in 1989. To prove that he’s made the Chairman based on his abilities and not nepotism, he was also the immediate past President of the Singapore Chinese Chamber of Commerce and Industry.
This is a very stacked Board of Directors. I am surprised to see that Mr John Lim (third from left), founder and CEO of ARA Asset Management Limited was part of the board here. Another person worth noting is Mr Chan Pee Teck, managing director of Crest Capital Asia.
In terms of experience, most of the directors have been with the company for more than 2 decades. Only Mr Gerard Tan (left-most) was appointed after 2000.
Remuneration
Overall, I feel that the remuneration is aligned with the interest of the shareholders as it is a performance-based system where about 50% of the executive directors’ pay is a variable portion that will incentivise them to create more value for the company.
They did not disclose the total remuneration amount but if I take the higher amount of the band, their total would be about 37% of the company’s Profit before Tax, which is on the higher end. However, if we compare their past 3 years remuneration where the company’s overall performance is better, it revealed that their remuneration band is still the same but variable portion has decreased in tandem with the poorer results for FY19. This means that their latest total remuneration should be at the lower end of the band.
Hence, I feel that overall the executive directors’ remuneration package is still quite fair to the shareholders as it is performance driven and the amount, although on the high side, is still acceptable.
Recent Challenges
FY18 was not a good year for Teckwah as both revenue and profit declined by 3.8% and 32.4% respectively. Management has stated that this is due to lower demand for their products as well as competitive pricing which has led to decreased margins.
In terms of business segments, their packaging business is their main revenue driver but their logistics business has a much higher margin and thus contributes 95% of their profit before tax. They have also slashed their dividend from 2cts a share to 1.5cts a share, amounting to about 3.3% dividend yield.
3Q19 Performance
For the nine months of FY19, Teckwah has recovered slightly in terms of their financial performance.
For revenue, even though they experience a decline in revenue for both Packaging and Logistics, their new Lifestyle segment contributed to make up the shortfall. Overall, Revenue for 9M19 increased 2.6% higher yoy from $123.6mil to $126.7mil.
Better cost management and higher grants from the China government meant that their profit before tax increased by 13.7% from $10.1mil to $11.4mil.
Better cash management also allowed them to increase their cash hoard by 16.1%. Current cash holding is about $41.8mil or 18cts per share.
Financials
Income Statement
Teckwah has been reporting consistent revenue and earnings. EPS has been in the range of 3cts to 5cts. The company has also consistent gross and net margins. Average net margin is around 7%. However in FY18, it has dipped to 4.8% due to the trade war and higher expenses.
Valuation Ratios
A declining ROE usually means that the company is not as efficient in making profits and value creation for shareholders as before. Both Teckwah’s ROE and ROA has been on a downtrend since 2010. Another warning sign used to determine diminishing efficiency is a faster asset growth compared to revenue growth. As we can see from the chart above, revenue remains stagnant but its tangible book value has risen by about 55% in the same period.
Cash Flow
Teckwah has been generating free cash flow for most of the years. The dip in 2014 is due to one off relocation costs to Pixel Red building and software upgrade expenses. Capex is generally lower than free cash flow and it means that Teckwah has been using its excess cash to reinvest into their own business and not using debt.
P/FCF is also rather low at 4.68.
Possible Catalysts
Industry 4.0 – In their 2018 Annual Report, the management has stated that they are focusing on going digital to poise themselves for Industry 4.0. (For more information on what is Industry 4.0, you can refer to this article here https://www.straitstimes.com/tech/empowering-the-singapore-workforce-for-industry-40) If Teckwah really manage to pull this off, it could provide them with many benefits such as improved efficiency, lower costs and increased innovation (which leads to increased revenue).
External Synergies – In 2019, Teckwah announced the acquisition of Profoto Digital Services which provides commercial printing services. This company complements Teckwah’s current portfolio well and it also expands the range of service that Teckwah can provide.
The purchase Profoto also comes with a increasing profit guarantee for the next 3 years which helped to ensure that there is growth value in this acquisition.
Although banking on the potential of new acquisitions is risky as you may never know when is the next M&A, any news on this front will be positive. With the CEO’s wide connection due to his former position as President of the Singapore Chinese Chamber of Commerce, I am quite confident that Teckwah will only seek synergistic tie-ups with companies that can further value-add to their customers.
Risk
Higher than expected transformation costs – Given that Teckwah is in the early stages of executing their transformation plan, it is difficult to tell how effectively its initiatives will be executed. Hence there is a risk of incurring higher than expected cost.
Raw Materials/Consumables Cost – In recent financial statements, management has warned of increased material/consumable costs that might negatively impact their margins if they are unable to pass these inflationary pressures on through price increase to their customers.
Macroeconomic Risks – The current COVID-19 virus has caused China to closed its borders and factories were delayed in reopening for business after the prolonged Chinese New Year holidays. This will definitely impact Teckwah’s business as China accounts for 30% of their revenue. However, given that Teckwah shares are already trading at a 30% discount to their NTA, it seems that the market has already taken into account the pessimistic outlook, offering a substantial margin of safety for long-term investors.
Conclusion
A quick look at their valuation ratios shows that Teckwah is currently rather cheap with EV/EBIT of 6.8 and P/FCF of 4.68. However, due to poor macroeconomic conditions, FY18 performance has led to decreased margins, ROE and ROA.
Latest financial report 3Q19 showed that Teckwah has successfully reduced their operating cost and increased their topline and bottom line with the acquisition of Profoto. This is rather promising as it could mean that Teckwah is turning the corner. However, investors should continue to monitor its performance and take into account how the latest “black swan” event could affect their business.
In my opinion, execution is key for the next few quarters to see if management can turnaround this company into a more efficient business.
I will not be investing in Teckwah for the time being. Even though it is cheap, I would prefer to see an improved ROE/ROA before making the investment decision.
Cheers
Note: The Moss Piglet is not vested and is not intending to invest in this company within the next 3 months.