China-based retail giant Alibaba created history once again on its flagship event Double 11 Singles’ Day sale on 11 November 2017, amassing an eye-popping gross merchandise volume of US$25.3 billion. The reported figures jumped 40.6 percent from last year’s US$18 billion sales, and dwarfed those achieved from US Black Friday and Cyber Monday combined. In comparison, US sales between Thanksgiving until Cyber Monday only attained total sales of US$12.8 billion in 2016.

Confronted by the relentless onslaughts from global e-commence retailers, does physical store operators the like of Challenger Technologies (Challenger) have what it takes to handle the disruptions created by their online counterparts? And where is Challenger’s place in today’s retail scene where it can gain a firm foothold?

What Is The Company Doing?

Challenger is not an unfamiliar brand name among the IT geeks, and usually will be one of the choices that comes to mind whenever we are in search of new IT gadgets such as personal computers, notebooks, printers, phones or tablets. Establishing itself as a premier retailer of IT products since 1984, Challenger today boasts 38 stores located island-wide to bring convenience to its loyal customer base.

The group’s core business through its IT products and services segment, involves retailing a large selection of IT products and solutions to consumers, and contributed 98.2 percent to its FY16 revenue. Apart from that, Challenger also has subsidiaries in the fields of electronic signage as well as provision of telephonic call centre and data management services, which accounted for 0.4 percent and 1.4 percent of the group’s FY16 revenue respectively.

Following the closure of its retail operations in Malaysia in FY14, geographical-wise Challenger’s top line is now fully derived from its Singapore’s operations. Although the group has closed its flagship store in Funan DigitaLife Mall last year owing to the mall’s redevelopment plan, Challenger has since prided itself on the opening of another flagship store at the basement of Bugis Junction in May this year which spans almost 14,000 square feet in floor area.

Unspectacular Earnings

Challenger’s profitability would be nothing to shout about. Its latest full-year results in FY16 saw revenue sliding 3.6 percent due to a lower contribution from retail operations in Singapore attributable to softer consumer demand. Likewise, net profit fell 33.7 percent in tandem with the lower revenue.

Over a five-year period, the group’s top-line inched up marginally from $337.3 million in FY12 to $339.4 million in FY16, realising a compounded annual growth rate (CAGR) of merely 0.2 percent. Net profit, unfortunately, declined at a CAGR of negative 7.2 percent to $12.1 million in FY16.

Source: Company Annual Reports

Source: Company Annual Reports

Latest quarter report did not show much improvement either. Challenger’s 9M17 revenue continued to decline by 8.9 percent to $233.1 million. Nevertheless, net profit rose 14.8 percent to $10.4 million underpinned by lower operating expenses and the absence of impairment loss provision on investments made last year on a last mile delivery company.

If You Can’t Beat Them, Join Them

There is a business strategy that goes like this. If there is a major trend which you are unable to overcome, embrace it and work along with it. Fortunately, that is exactly what Challenger has been doing.

In April 2016, Challenger launched its new online tech marketplace to complement its existing extensive network of physical stores around Singapore. Challenger’s online presence has allowed the group to offer a wider range of products to its customers, and the convenience of 24/7 shopping and drop-shipping options such as same-day in-store pickup and delivery can also greatly enhance the users’ shopping experience.

The e-commence platform played a critical role in supporting the group’s weak revenue, by contributing approximately 10 percent of its 1Q17 total retail sales. Management has also set an aggressive target of crossing the 50 percent mark from online sales revenue within the next five years. Apparently, Challenger is looking at as more than just an online extension of its physical stores, but an added growth engine with the scalability which the group intends to leverage on, owing to its limitless inventory space and the potential new customers that it may reach out to.

Challenger As A Dividend Play

Investors who are unconvinced of Challenger’s growth potential perhaps may want to look at it from the perspective of a strong dividend distributor. Trading at a market price of $0.44 as at 20 November 2017 and based on its FY16 dividends payout of $0.027 per share, this translated to an attractive dividend yield of 6.1 percent. Challenger has a good track record of rewarding its shareholders with handsome dividends by distributing payouts every year consistently without fail over the last five years. Moreover, the payouts in fact grew at a CAGR of 4.7 percent from $0.0225 in FY12 to $0.027 in FY16, which means that dividend yield – already on the high-side – has been growing over the last five years.

We believe that Challenger’s payout is sustainable underpinned by its robust cash flow generating capability and healthy balance sheet. Except for an exceptional large cash outflows attributable to trade and other payables in FY15 resulting in an operational cash flow of only $5 million, cash flow from operations for the rest of the last five years were maintained in excess of $16 million. Coupled with zero debts and a net cash asset of $49.4 million on its balance sheet as at 30 September 2017, Challenger is very capable of continuing to deliver a lucrative dividend payout in our opinion as per what the group has always been doing.

It is also noteworthy that Challenger’s dividend payout ratio from net profit has been maintained in a reasonable range between 45 percent and 75 percent, giving the group ample flexibility to sustain payout in unexpected circumstances. Likewise, payout ratio from free cash flow fluctuated between 45 percent and 65 percent should the unusual spike in FY15 due to low operational cash flows was taken out of the picture.

Source: Author’s Own Compilation

Source: Author’s Own Compilation

In comparison with some of its peers listed on the Singapore Exchange with an average dividend yield of around 2.9 percent, there is no doubt that Challenger appears to be a candidate worthy of consideration for an investor looking to add a retailer into his portfolio, while offering reasonably high and stable dividend payout at the same time.

(As at 20 November 2017)

(As at 20 November 2017)