Can Challenger Technologies Ltd Turnaround Its Business?
January 8, 2020
Founded in 1984, Challenger Technologies Ltd (SGX: 573) has emerged to be a leading retailer of IT products in Singapore with 40+ retail outlets nationwide. It is worth S$ 179.5 million in market capitalisation. In this article, I’ll cover the IT retailer’s financial results and valuation figures. Therefore, here are 10 things to know about Challenger before you invest:
Revenue Challenger had recorded continuous decline in group revenues from S$ 385.4 million in 2013 to S$ 320.2 million in 2018. This is due to having a continuous fall in retail sales in Singapore and closure of its outlets that are based in Malaysia during the period.
Profitability Despite the fall in sales, Challenger have kept its shareholders’ earnings at around S$ 15 million per annum. This is due to a decline in operating expenses incurred with lower rental expenses and cost of sales spent in the period. Net profit margins improved from 4+% levels in 2012-2014 to 6.1% in 2018. It achieved a 5-Year Return on Equity (ROE) of 20.4% a year, thus, indicating that it had made S$ 20.40 in annual earnings from every S$ 100 it has in shareholders’ equity from 2014 to 2018.
Cash Flow Management From 2012 to 2018, Challenger had brought in S$ 118.8 million in cash flows from operation. Out of which, it has incurred the following:
– S$ 15.9 million in net capital expenditures (CAPEX). – S$ 16.6 million in net long-term borrowings. – S$ 62.4 million in dividends to its existing shareholders.
Overall, Challenger had increased its cash reserves from S$ 42.1 million in 2012 to S$ 63.2 million in 2018. This shows that Challenger had built itself a track record of bringing in operating cash flows consistently and had opted to pay dividends to reward its shareholders in that period.
Inventory Days Challenger’s inventory days have slowly increased from 38 days in 2012 to 56 days in 2018. It shows that Challenger takes 56 days to convert its inventory into sales in 2018, slower than 38 days in 2012. It tallies with the company’s slowdown in sales figures for the last 6 years.
Balance Sheet Strength In Q3 2019, Challenger does not have interest-bearing debt and S$ 97.7 million in shareholders’ equity. Thus, it has no gearing ratio. Also, it has reported to have S$ 121.8 million in current assets and S$ 43.9 million in current liabilities. Thus, its current ratio is 2.77.
Latest 12-Month Financial Results Over the past 12 months, Challenger had generated S$ 330.5 million in revenues. From it, the retailer made S$ 18.3 million in earnings or 5.30 cents in earnings per share (EPS). Revenue had increased marginally for the last 12 months due to higher trade shows and corporate sales. But, profits were slightly lower due to higher staff expenses and rental expenses incurred for its new store openings in Paya Lebar Quarter, West Coast Plaza and the Jewel Changi Airport in 2019.
Group Revenue (S$ ‘000)
Shareholders’ Earnings (S$ ‘000)
Earnings per Share (EPS) (Singapore Cents)
Major Shareholders Loo Leong Thye, Ng Leong Hai, and Ong Hock Hwee are the three major shareholders of Challenger with 42.97%, 24.06% and 10.12% interest in the retailer respectively. Loo is the CEO of Challenger and possesses an indirect stake in Challenger through his wife, Ong’s 10.12% stake within the company. Their daughter, Loo Pei Fen is the Group Chief Marketing Officer of Challenger.
P/E Ratio As of 19 December 2019, Challenger is trading at S$ 0.52 a share. Thus, its current P/E Ratio is 9.81, just below its 7-year average of 10.14.
P/B Ratio In Q3 2019, Challenger has net assets of 28.30 cents a share. Hence, its current P/B Ratio is 1.84, which is below its 7-year average of 2.31.
Dividend Yields In 2018, Challenger has paid out 3.1 cents in dividends per share (DPS) and thus, continuing on its track record of paying a small rise in DPS for the last two years. If Challenger is able to maintain its DPS at 3.1 cents, then, its current dividend yield is 5.96% per annum, which is above the retailer’s 7-year average of 5.52% per annum.
So, is Challenger a good investment, considering that it is now trading at below 10 in P/E Ratio, below average in P/B Ratio and offers 5.96% in dividend yields a year at current price?
Well, it depends on one’s investment objective.
Personally, my own objective is invest for incremental dividend income. Thus, it would be practical for me to find a stock to first possess the three things below:
1. Track Record of Growth in Sales, Profits, and Dividend Payouts.
2. Financial Strength to Invest for the Future. 3. Reveals via Reports / Announcements its Future Growth Plans.
The three above should be met before looking at its valuation figures.
In the case for Challenger, it has financial strength to invest for growth for it has no interest-bearing debt and S$ 69.1 million in cash reserves in Q3 2019, which is the #2 criteria. In regards to #1 criteria, it has delivered falling group revenue and, at best, maintained its profits at S$ 15 million levels for the last 6-7 years.
In addition, in Q3 2019, the company has revealed that its retail contribution is falling despite opening new outlets in Paya Lebar Quarter, West Coast Plaza and the Jewel Changi Airport.
So, will Challenger be able to grow its sales and profits in the future? That, I will leave you to decide as fellow investors.
The next question is: ‘What if the stock offers good value but has no element of growth? Is it still a good investment?’
For me, the answer is ‘not really’ for my own objective is to find stocks that are able to deliver growing dividends. If a stock cannot grow its revenue and profits over the long-term, how then it is able to pay me increasing dividend income in the long run? That is why an investor should consider both its growth and value elements before making a proper investment decision.
Financial Content Machine. Dividend Investor. Produced 450+ Financial Articles featured in KCLau.com in Malaysia and the Fifth Person, Value Invest Asia, and Small Cap Asia in Singapore. Regular Host and Presenter of a Weekly Financial Webinar with KCLau.com. Co-Founded DividendVault.com, an online membership site that empowers retail investors to build a stock portfolio that pays rising dividends year after year in Malaysia and Singapore.