Broadway Industrial Group – Slugging It Out

Broadway Industrial Group (Broadway Industrial), a Singapore-listed entity specialising in the manufacturing of precision-machines components for the electronics, automotive, oil & gas (O&G), and other industries issued a profit guidance announcement this past week (May 03, 2019) that it is expected to report a net loss for the first quarter ending March 31, 2019.

The expected net loss was principally driven by the decline in revenue from the Hard Disk Drive (HDD) business. The company did not provide any specific figures, but it expects to do so when it released the final earnings figures on or before 15 May 2019.

Historical Performance

 broadway margins

Source: SGX StockFacts, Company’s Financials

Broadway Industrial’s topline has not shown any major upturns since FY15. Revenue was flatlined from FY16 to FY18.

The operating and net income excluding extraordinary items margins, while having returned to positive territory, did not stage any major upturn in recovery and have been hovering slightly above one percent in the last two financial years.

That said, with the near-bottoming of the hard disk drive (HDD) market, is Broadway Industrial seeing light at the end of the tunnel?

Potential Demand Growth Returning In 2019

 broadway nearline demand

Source: Forbes.com (February 04, 2019), Seagate Technology

According to an article titled “2018 Hard Disk Drive Results” on Forbes, dated 4 February 2019, the author pointed out that US-listed Seagate Technology saw a major drop in nearline demand for HDD exabytes (EB) to 33.0 EB in 2Q19 from 44.5 EB in FY18.

However, the author noted that the trend in EB growth suggested that the HDD market is “about to be about a 2-year cycle in nearline hard drive demand”. The author added “if this demand cycle continues then we would be looking at recovery and growth through 2019 with another peak in nearline HDD demand sometime in 2021.”

Broadway Industrial’s Cash And Debt Position?

  FY 14 FY15 FY16 FY17 FY18
Total Cash and Short-Term Investments ($’m) 35.8 48.2 145.2 18.1 11.5
Total Debt/Total Assets 24.6% 26.6% 28.2% 5.6% 19.2%
Total Debt/Total Shareholders’ Equity 58.4% 74.9% 69.6% 14.4% 47.0%
Operating Income/Interest Expense (times) 0.61 (15.1) (6.8) 3.5 3.0

Source: SGX StockFacts, Company’s Financials

In terms of financial health, Broadway Industrial’s overall cash balances have been declining, while debt leverage levels measured by total debt-to-total assets and total debt-to-total shareholders’ equity have spiked upwards in FY18. The total debt-to-total assets percentage rose from 5.6 per cent in FY17 to 19.2 percent in FY18, while the total debt-to-total shareholders’ equity rose from 14.4 percent in FY17 to 47.0 percent in FY18.

Despite the rise in overall debt levels, and the slowing growth in the company’s overall cash balances, the interest coverage ratio measured by operating income-to-interest expense stayed largely unchanged from 3.5 times in FY17 to three times in FY18.

The cash flow from operating activities (CFO) showed a negative figure of minus $28.7 million in FY18 from S$6.6 million in FY17, with the largest change in FY18 coming from the negative change in working capital amounting to minus S$34.5 million in FY18.

 broadway working capital

Source: SGX StockFacts, Company’s Financials

How does Broadway Industrial’s valuation ratios compare with the peers?

  Broadway Industrial Group Cheung Woh Technologies
Price/Book Value (P/BV) 0.27 0.37
Price/Sales (P/S) 0.060 0.41
Dividend Yield (%) N/A 1.3%
Dividend Yield (%) – 5-year average N/A 3.7%
Enterpise Value (S$’m) 51.0 45.1
Price/Cash Flow (P/CF) 1.4 11.5
Price-Earnings (P/E) Ratio 12.662 N/A
Net Debt (S$’m) 27.9 (8.0)

Source: SGX StockFacts, Company’s Financials (03 May 2019)

Cheung Woh Technologies appears to be the closest peer with Broadway Industrial as both entities specialise in manufacturing HDD peripherals, and have some precision engineering business components in their respective businesses.

Comparing the valuations of both companies, one might note that Broadway Industrial’s price multiples appeared to be relatively lower than Cheung Woh Technologies. However, Broadway Industrial is carrying a net debt balance of $27.9 million while Cheung Woh Technologies is carrying a net cash balance of $8 million.

 broadway comparison

Source: Shares Investment (May 03, 2019)

Looking at the comparison (comps) chart shown above, one might notice that Broadway Industrial’s price-to-book (P/B) multiples appeared to be significantly lower than its sector and the broader market indices. This is another observation of the illustration above when compared to Cheung Woh Technologies.

Historical Price Performance

 broadway historical

 Source: Shares Investment (03 May 2019)

On a one-year basis, stocks of Broadway Industrial have trended downwards. As of 03 May 2019, the stock was trading around $0.049 and market capitalisation of stood at $23.1 million. The average three-month daily trading volume amounted to 2.3 million shares according to the data provided by SGX StockFacts.

How should investors approach the counter?

With Broadway Industrial’s upcoming first quarter ending March 31, 2019 earnings report around the corner, and considering the latest negative net profit guidance issued on May 03, 2019, investors will inevitably stay cautious when dealing with the counter. This is especially so as the latest reading of Singapore’s Purchasing Managers’ Index (PMI) slipped to 50.3 in April 2019, down by 0.5 from March 2019, and it is the lowest reading since November 2016. Moreover, the electronics sector PMI fared worst as it came in at 49.5 in April 2019, down 0.3 point from March 2019, marking six months of consecutive contraction as reported by The Straits Times newspaper.

However, for investors who have strong beliefs or data which might point to possible recovery in the HDD segment in 2019 as pointed out earlier, they may consider putting a position. But, this ‘gut feel’ type of investment is not for everyone, and should only be undertaken if investors feel confident about the overall fundamentals of the industry, or have some industry background experience to time the market.

Related Article:

SI Research: 3 Stocks To Long Despite Their Unimpressive Quarter

 

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