Protected: Powermatic Data Systems

NAME: Powermatic Data Systems Limited TICKER: SGX: BCY MARKET CAP: SGD 60.47M @ 21-06-2019 MARKET PRICE/SHARE: SGD 1.74 @ 21-06-2019 INDUSTRY: Communications Equipment  

Company Profile

Powermatic group was incorporated in 1991 to distribute mass-market computer peripherals and a year later Powermatic Data Systems Ltd. was listed on the Singapore Exchange (Main Board) providing LAN connectivity products. In 2002 it launched its own line of Compex network adapters, hubs, bridges and mass storage subsystems. Today, it has developed into a tech company focused on developing, manufacturing and marketing computer products related to Internet access like routers and switches. Although based in Singapore, the group holds a manufacturing plant in Suzhou, China and through subsidiaries Compex Systems and Compex Suzhou, it established itself as Qualcomm’s Authorised Design Center (ADC) in South East Asia. Powermatic provides products and services to a global clientele that includes reputable distributors of electronic and wireless device components, system integrators, wireless products design houses, and Fortune 500 corporations.  

1. Business Model & Economic Moats

Wireless connectivity is the key driver of Powermatic’s business. From radio modules and access Points, the group released several leading wireless products. It operates under 3 major business units.

(i) Product design and manufacturing

Through subsidiaries Compex Systems and Compex Suzhou, Powermatic designs and manufactures wireless connectivity devices. This service includes the provision of OEM, ODM, and JDM for wireless solutions. The offer ranges from high-performance wireless radio modules, embedded boards, indoor and outdoor access points, and wireless antennas. These products are used in factory automation, healthcare, hospitality, security surveillance industries, and others. As previously mentioned, Compex Systems is Qualcomm’s official Authorized Design Centre in South East Asia.

(ii) Ready-to-go solutions

The group also provides readily available solutions to integrate into the client’s design requirements.

(iii) Distribution

In distribution, the group's focus is on mass storage and networking products. It distributes Seagate hard disks, Eizo monitors, Adaptec host adapters, NEC servers, Fujitsu and Olympus magneto-optical drives, PK power suppliers, Compex network adaptors, switches and routers, and Proware and Raditec RAID solutions.  

Economic Moats

• Business Model

Its versatile business model and the high value add business comprises an additional advantage over Powermatic’s competitors. The company’s ability to offer hardware and software designing capabilities allows for higher gross margins than its peers without that expertise.

• Financial Position

Powermatic has a rock-solid balance sheet. We’ll see it in detail below, but the company has zero debt and its investment property is also unencumbered.

• R&D

The company’s R&D team is constantly developing new proprietary products to meet a fast-growing market.

Our years of research and development efforts had come into fruition. The two patents on 4x4 wave 2 wireless module we filed in FY2018 in China were approved in April 2018, giving us a good platform to market our proprietary products – Annual report.

 

2. Growth Strategy

  The group is betting heavily on the wireless connectivity business with a special focus in the Asian markets. We can see that by the fact that Powermatic managed to add several new Asian customers with high purchasing volume and also because the distribution business now accounts for less than 2% of total revenue, compared to around 30% in 2013. This makes perfect sense given the 5G telecommunication and Internet of Things (IoT) globalization trends. A new generation of applications will be introduced to take advantage of the greatly-increased bandwidth and network speed requirements of 5G, creating greater demand for network access. The company keeps releasing cutting-edge products, affirming itself as a pioneer in the space. In terms of near-term growth opportunities, Powermatic mentioned deploying wireless access points to provide internet access in the rural areas of Thailand, India, and Scandinavia. Interestingly, its customers have been integrating Powermatic’s products in drones and CCTV systems for monitoring and surveillance applications, which can also represent a future growth avenue. Just to give you an idea of the potential market size and growth, estimates point to a CAGR of 47% in the number of connected Smart Home devices in the next 3 years and 29% in the number of connected cars in the same period.  

3. Financial Analysis

(i) Financial Performance

Source: Full Year Results Source: Shareinvestor.com While the total revenue has been plateau-ing from Yr2015 to Yr2018, recent revenue performance has been quite solid. The company just recorded 30% growth YoY in the last reported year and we expect it to keep delivering some positive numbers with the adoption of the 5G networks worldwide as well as the increased number of connected devices. Net profits also increased in tandem, up 55% to S$7 mil compared to last year. The good set of results can be attributed to repeated business from existing contacts and the ability of the company to secure orders from new customers for the sale of Wi-Fi modules, embedded boards, and other wireless connectivity products. Source: Shareinvestor.com Things are looking even more exciting in terms of its profitability - Gross profit margins have been growing at an average rate (CAGR) of over 20%/year. Although the gross margin is a little lower compared to the previous year, that’s still a respectable 48%, a margin most companies would 'die for'. Source: Shareinvestor.com As we can see, this positive performance is also reflected in the bottom line. Net profit increased over 50% YoY and net margins also surged to a record 33%. Some one-off factors also helped such as

• Gain in FX,
• Higher income from fixed deposits and
• Higher dividend from investment in equity shares.

(ii) Financial Position

Source: Full Year Results The company has a relatively stable financial position, with the following:

• Current ratio consistently above 5 (cash ratio >3),
• Net cash position of over S$30 million.
• Short cash conversion cycle at 16 days (see below).

Source: Shareinvestor.com FCF has hit a record high in the last year at S$9 million, mostly due to improved operational performance and proceeds from the disposal of quoted equity shares. CAPEX has remained very low and actually, cash was mainly used in financing working capital and payment of dividends to shareholders. Source: Shareinvestor.com Regular dividend per share has been steady at 5 cents since 2016, but the company has increased the payout of special dividends from 2 to 3 cents per share, in the last year. That means a current 2.9% dividend yield. Sourced from Annual Reports and Shareinvestor.com

Financials in a nutshell:

• Powermatic is at an exciting stage of development, posting record growth in sales and profitability;
• The company’s financial position is rock-solid, with a very liquid asset base and nearly zero debt;
• In terms of cash flow, the company is driving most of the cash from operations as we like and has followed a disciplined capital deployment strategy.

 

4. Key Management Personnel

Source: Annual reports 2018 We believe the compensation scheme for Powermatic is adequate, incorporating both fixed and variable components, and including a share option scheme.

Source: SGX Stockfacts

As we can see, directors also have skin in the game, with almost 65% of the company belonging to the directors of the group. We couldn’t ask for better alignment between management and shareholders.

• Chen Mun – Chairman & CEO

At 70 years old, Mr. Chen is the founder of Powermatic. He graduated in engineering from the University of Singapore, where he later lectured, and a Ph.D. in engineering from the Imperial College in London. He holds the majority of the company’s stock (c. 54.2%).

• Katherine Ang Bee Yan – Executive Director

Ms. Ang joined Compex in 2003 as director of Sales & Marketing and in 2011 she was appointed executive director of Powermatic. She owns a 8.03% stake in Powermatic too. She is also in the board of directors of Euromarcom since 2000. Ms. Ang has over 20 years of experience in the industry and plays a key role in the business development of the group.  

5. Risks & Concerns

(i) Shortage of production materials

A short-term risk for Powermatic is the negative impact of component shortages. This situation has already affected the company’s lead times, though management stated that Powermatic is able to maintain its product prices for the moment.

(ii) Competition

  The proliferation of device suppliers means keen competition amongst the players. Powermatic’s wireless connectivity products face competition from system-on-chip solutions that incorporate Wi-Fi capability (among other features) into a single chip. That said, we are sanguine given Powermatic's focus on this area and the ability to secure 2 patents from it.

(iii) China-US tensions

Given that its factory is located in China, Powermatic also faces risks derived from the current trade-war that’s dividing the world. Additionally, there are risks of rising wages and worker shortages in China too. To allay concerns over the hike in tariffs as the trade war continues to worsen, the Group has purchased a factory unit in Kulai, Malaysia. From the annual report:

The factory will serve as an alternative production facility to cater for business growth and to fulfill the needs of our customers who wish to buy the products made in South East Asia.

(iv) Succession

  Founder and CEO Mr. Chen is 70 years of age and there could come a time where the helm of the company has to be changed. It may result in change of culture and a direction of the company going forward. We believe this issue should be addressed by the management as soon as possible to mitigate any potential negative impacts of a drastic change in management.  

Conclusion – Our take on Powermatic

Here’s our Pentagon Rating for the company as shown below:

Business Model	5
Growth Prospects	5
Management	4
Financials	5
Risks	4
Total (out of 25)	23

To conclude, Powermatic is ticking all the boxes we like.

• Great operational performance coupled with a cash-rich balance sheet
• Bright growth prospects as Powermatic is ready to seize 5G and other opportunities around the world.
• To add icing on the cake, the company also earns passive income from other non-operating sources like property (rental from its investment property) and dividend (from its quoted and unquoted investments), which is definitely a plus from a shareholder perspective.

The stock price is up 20% this year and is still trading at less than 9x earnings. With a dividend yield close to 3%, we believe this company is a good catch as of now. Nonetheless, we have to note that Powermatic is not a very liquid stock, so if you’re looking to build a decent position, you’ll need to be patient and add on to it gradually.   Further reading:

• https://finance.yahoo.com/news/powermatic-data-systems-limited-sgx-034546261.html
• https://www.theedgesingapore.com/powermatic-data-powering-ahead-cimb-starts-stock-add
• https://www.fool.sg/2019/04/23/top-5-singapore-shares-for-dividend-investors/