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Would This Share’s 416% Growth in Price Continue?

In this era of instant connectivity and modern conveniences, to say that electronic gadgets and Information Technology (IT) products are crucial to everyday-life would be an understatement. Just look around – mobile gadgets, laptops, desktops, and the latest bells and whistles are everywhere.

For a retailer specialising in IT products and gadgets, this can be seen as a good a time as any to be in business. But, the retailing business of such products can actually be cut-throat. For instance, in the USA, technology products retailer Best Buy Co. (NYSE: BBY) has logged cumulative losses of US$1.27 billion over its last three financial years while a more diverse retailer like HHgregg (NYSE: HGG) – the equivalent of a Courts Asia (SGX: RE2) in the USA – has seen its profits over the last 12 months get slashed by more than half from what it earned during its March 2011 financial year.

For a certain Singapore-based technology product-focused retailer however, the last decade has been extremely profitable. Meet Challenger Technologies (SGX: 573), a company whose profits have jumped by 185% from 1.74 Singapore cents per share in 2003 to 4.96 cents in 2013.

Over the past decade, the company’s shares have reflected the strong growth in its corporate profits and had posted market-beating returns. While the broader market, as represented by the Straits Times Index (SGX: ^STI), had gone up 75% from 1,854 points on 16 April 2004 to 3,251 today, Challenger Technologies’ shares have gained some 416% in price from S$0.113 to S$0.585. If reinvested dividends were factored in, the company’s shares would have done even better with a total return of 1,500%.

With its strong history of solid returns, can Challenger Technologies continue its market-beating performance for its investors? That’s a question where a useful checklist, from investing legend Peter Lynch’s book One Up on Wall Street, can help with.

1) The Price-Earnings ratio: Is it low or high for this particular company and for similar companies in the same industry? (Generally, low PEs are preferred)

At its current price of S$0.585, Challenger Technologies is valued at 12 times its trailing earnings. Meanwhile, the Straits Times Index carries a trailing PE ratio of around 14 at its current level.

With 40 outlets specialising in IT products in Singapore under the Challenger, Musica, and Valore brands, there are no real ‘similar’ companies in Singapore’s stock market except for Courts Asia. But even then, Courts Asia has a more diverse product line that includes furniture and household appliances. Nonetheless, Courts Asia’s valuation can still provide investors with a yardstick for Challenger Technologies. On that front, Courts Asia is slightly cheaper with a PE ratio of 10.

Pulling it all together, we have Challenger Technologies with a PE ratio that’s not too high when compared with that of the general market, though it’s not the cheapest amongst its peers.

2) What is the percentage of institutional ownership? The lower the better

Based on Challenger Technologies’ latest annual report, as of 20 March 2014, the company’s chief executive Loo Leong Thye (who’s also the founder) has a controlling stake of some 53%. Another individual, Ng Leong Hai, owns almost a quarter – 24.4% to be exact – of the company. This leaves very little room for institutional investors (i.e. big money managers) to establish meaningful stakes.

In any case, Lynch’s criterion here was meant to sieve out companies that were not being noticed by institutional investors as that would mean he would have a better chance of finding legitimate bargains. Based on Challenger Technologies’ latest list of its 20 largest shareholders, there’re hardly any institutional investors mentioned.

3) Are insiders buying and whether the company itself is buying back its own shares? Both are positive signs

A quick glance over at the company’s announcement pages on the Singapore Exchange’s website would reveal that there was no buying activity over the past six months by both insiders and the company itself.

4 ) What is the record of earnings growth and whether the earnings are sporadic or consistent?

As mentioned earlier, Challenger Technologies’ earnings per share has gone up almost three-fold from 1.74 cents in 2003 to 4.96 cents in 2013. But, what’s not mentioned is the company’s consistency in generating profit growth. The table below would give you a better idea of what I mean.

Year

Earnings per share
(Singapore cents)

Year-on-year change

2003

1.74

2004

1.26 -28%

2005

1.65 31%

2006

1.55 -6%
2007 2.41

6%

2008 1.78

-26%

2009

3.22

81%

2010 3.96

23%

2011

4.53

14%

2012 4.69

4%

2013 4.96

6%

Source: S&P Capital IQ

So in response to Lynch’s question, Challenger Technologies has had consistent earnings that has been growing steadily.

5) Does the company have a strong balance sheet?

Based on its latest financials, Challenger Technologies has almost S$43 million in liquid cash on hand on its balance sheet while having zero debt. So, that certainly qualifies as having a strong balance sheet. And interestingly, the company has had a history of operating with either minimal or no debt over the past 10 years.

6) Does the company have room to grow?

In this criterion, Challenger Technologies does seem to fall short. At last count, the retailer already has 40 stores located throughout the island here. This would certainly give rise to legitimate concerns about market saturation in Singapore and leave overseas expansion as the likelier path for growth.

On that front, there are concerns about the company’s ability to execute its business plan outside the shores of Singapore. It had just announced in March this year that it will close all of its Malaysia-based retail activities under the Challenger brand by the end of the second quarter. Instead, it would focus on building out its private label retail brand Valore (a mobility and lifestyle accessories concept) in Singapore’s northern neighbour.

So even though the company is still committed to expanding its retail footprint in both Singapore and the surrounding region, it remains to be seen if there is indeed enough room in the IT-products market to house Challenger Technologies’ growth-ambitions.

Foolish Bottom Line

All told, Challenger Technologies has done well on four counts on Lynch’s checklist: 1) Having a low PE ratio; 2) having low institutional ownership; 3) displayed consistent and growing profits; and 4) having a really strong balance sheet.

But, despite more positives than negatives, that does not mean that Challenger Technologies would be a market-beating investment going forward. Can the company withstand the threat of online retail? How does its cash-conversion-cycle (a useful measure on the efficiency and quality of a retailer’s business) look like? Has the company been able to handle its inventory well? These are just some of the other important questions investors have to answer before an investing decision can be made.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn’t own shares in any companies mentioned.