Thursday, 16 February 2017

CHALLENGER: STAYING RELEVANT IN CHALLENGING ENVIRONMENT

TARGET PRICE: S$0.50 (HOLD)

UPSIDE: 4%





Challenger Technologies reported their FY 2016 results yesterday. Net profit fell 27% from S$18.2m in FY2015 to S$13.2m in FY 2016. Revenue remained stable, declining slightly from S$352.2m to S$339.4m. Dividend per share increased to 2.7 cents, up from 2.65 cents a year earlier.



Online expansion with Hachi.tech



Challenger launched their online retail marketplace, Hachi.tech in April 2016. Since then, online sales have offset some of the loss of revenue from physical retail stores. We believe that Challenger's expansion of its online retail business has the potential to more than offset the fall in sales from its physical stores. With more consumers turning to online shopping, transforming to eCommerce is key to ensuring that Challenger adapts to the changing retail industry.

Challenger has also indicated that it plans to close a number of non-performing outlets in the first half of 2017. This would have a positive impact on the its bottom line, as operating expenses would be reduced.   


Strong balance sheet



We like Challenger's strong balance sheet, as of 31 Dec 2016, Challenger has S$52.2m in cash and cash equivalents and zero debt. This net cash could potentially be used for expansion of business, acquisitions, or paid out to shareholders as a special dividend. Nonetheless, there is also risks that investments made do not perform up to expectations, as seen from Challenger's provision for impairment of $1.1m in 4Q 2016, on its investment in a last mile delivery company.


Possibility of being delisted



We note the possibility of Challenger being delisted, as a number of local firms including OSIM and Eu Yan Sang have been taken private over the past year. CEO Loo Leong Thye and his family owns a total of 54.4% of the company, while the top twenty largest shareholders together own a combined 89.26% of shares, as indicated in its 2015 Annual Report. 

Given Challenger's consistent earnings and low market captitalisation, we believe that the company may potentially be taken private.


Our Valuation



20122013201420152016
EARNINGS PER SHARE (cents)4.694.964.285.293.89
DIVIDEND PER SHARE (cents)2.252.522.352.652.70
PAYOUT RATIO47.97%50.81%54.91%50.09%69.41%


We maintain a hold call on Challenger, given its low valuations, stable and high dividend yield. At its current price of S$0.48, Challenger trades at a P/E ratio of 12, and a dividend yield of 5.6%, making it an ideal dividend stock. We note that the payout ratio for FY 2016 is higher than previous years, and would continue to monitor the payout ratio for future dividend payments, to ensure that any increases in dividend is supported by underlying earnings growth.




Disclaimer

This research report is based on information obtained from sources believed to be reliable. AlpacaInvestments does not make any representation or warranty as to its accuracy, completeness or correctness. Whilst we have taken all reasonable care to ensure that the information contained in this publication is not untrue or misleading at the time of publication, you should not act on it without independently verifying its contents. This publication has not been reviewed or authorized by any regulatory authority in Singapore or elsewhere. AlpacaInvestments accepts no liability arising whether directly or indirectly as a result of the recipient acting on such information or opinion or estimate. This report is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. AlpacaInvestments may from time to time have interests in the securities mentioned in this report, and our opinions expressed in this report are subject to change without notice. This report is intended for information purposes only, and should not be regarded as a substitute to your own judgement. 



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