The month of May 2019 came and went with several local semiconductor counters coming off from their highs. Counters like AEM Holdings, Venture Corporation, Sunningdale Holdings, Valuetronics Holdings and UMS Holdings, among others have seen their stock prices tapering down on the escalation of the US-China trade relations.
Despite the negative sentiment, one stock seemed to have bucked the trend: Powermatic Data Systems (Powermatic). In its latest FY19 earnings release, Powermatic’s revenue rose 29.8 percent to $21 million while net profit jumped 54.8 percent to $7 million during the same period.
Powermatic is in the business of designing hardware systems for wireless fidelity (WiFi) connectivity solutions for customers’ products, and its distribution segment includes sales, marketing, and distribution of compute and compute parts, and peripherals. It is also in the property business.
At the share price of $1.75 as at the start of June, the stock’s one-year return was 3.6 percent, while the three-year return was 76.8 percent.
Over the past few years, from FY14 to FY19 (the period in review), Powermatic’s revenue and margins have been trending upwards. In fact, FY19 was an exemplary year since FY14. Management attributed the splendid performance to the company’s ability to secure orders from new customers, apart from the existing contracts.
The main stream of the revenue came from the sale of WiFi modules, embedded boards, and other wireless connectivity products. In addition, the Group also provides technical support for US-listed Qualcomm’s Atheros reference design and other sales related services.
Source: Company’s Financials
While the company does not break down the company’s exposure into China, it only takes an educated guess to know that the Chinese market should be taking a big chunk of the pie given its high demand for surveillance products and hence WiFi systems.
The United States is primarily targeting Chinese firms that are primarily or have some business links dealing with surveillance systems. Mainland Chinese firms such as Hikvision, and Huawei have been particularly impacted from the increased scrutiny by the US government recently.
Management noted that it is mindful about the escalation of the US-China trade tensions, and some of its customers had expressed their desire to source for other products made elsewhere than in China. Powermatic’s management then added that the Group has committed to purchase a factory in Kulai and Johor, Malaysia, and the facility was completed in April 2019. The facility will serve as an alternative production facility to cater for business growth and fulfill the needs of its customers who wish to buy products made in Southeast Asia (SEA).
However, management did not explain or address the potential risks arising from the installation and use of WiFi systems in surveillance equipment which might come under further scrutiny by the US government given the latest Huawei fisasco. This could be a potent risk that investors might want to take note of or to probe further..
Cash And Debt Positions
Powermatic’s total cash and cash equivalents balance has been increasing throughout the years, and as of FY19, the company’s balance sheet stood at $35.4 million. The company’s net cash from operations (net CFO) for FY19 stood at positive $8.5 million compared to just S$3.2 million in FY18. Powermatic does not have any significant interest-bearing debt.
|Powermatic Data Systems|
|Price-to-Book Value (P/BV)||1.01|
|Dividend Yield (%)||2.9%|
|Dividend Yield (%) 5-Year Average||4.6%|
|Enterprise Value (S$’millions)||35.0|
|Price-to-Cash Flow (P/CF)||12.0|
|Price-to-Earnings (P/E) ratio||12.6|
Source: SGX StockFacts
Source: Shares Investment
While Powermatic’s current valuation seems fair and not too demanding. However, the counter experiences higher volatility as compared to the manufacturing sector.
With a total market capitalisation value of $62.7 million, the stock’s average three-month daily trading volume was only about 140,000 shares. The stock is also not an actively covered by many stock research or sell-side firms.