It’s Been A Challenging Year For Challenger Technologies So Far: What’s Next?

Information Technology products retailer Challenger Technologies Limited (SGX: 573) released its second quarter earnings this week and saw double-digit year-on-year declines for both revenue and profit.

The firm has a total retail network of 44 stores which are all located in Singapore. It used to operate in Malaysia, but has since closed down all its stores there. The company has many different store formats within its network: one is its flagship Challenger megastore; 21 are Challenger superstores; 13 are Challenger mini stores; seven sells its Valore-branded electronic lifestyle products almost exclusively; and two are concept stores known as Musica which focuses on music-related electronic products.

For the six months ended 30 June 2014, Challenger Technologies’ revenue tumbled by 13% year-on-year to S$168 million due mainly to weaker corporate sales in Singapore and the closure of all retail operations in Malaysia.

But despite the fall in sales, the company’s gross profit margin managed to climb by 3% to 20.9% because of robust sales of accessories from its private label, Valore.

The increase in gross profit margin couldn’t save Challenger Technologies’ bottom-line however as its net profit dropped 27% to S$6.2 million from a year ago. Main culprits were thinner margins from branded IT products and rising depreciation charges, rentals and staff costs. In particular, Challenger Technologies’ rental cost went up 36% to S$8.9 million while staff costs nudged up 3% to S$11.8 million; in short, it had been a challenging operating environment for the firm in the first part of the year.

The fall in profit also dragged down its earnings per share by a similar amount; Challenger Technologies’ EPS fell 27% to 1.8 Singapore cents.

The company’s Chief Executive Officer Mr. Loo Leong Thye commented on the company’s rising rental and staff costs:

“Stores within our retail network will have to work harder. We will continuously monitor stores that are not performing up to our expectations by sizing down or closing stores.”

As of 30 June 2014, the firm had a cash balance of S$40.2 million with debt at zilch.

Challenger Technologies also ended the first half of the year with net cash flow from operations of just S$5.2 million, a 39.2% decline compared to a year ago. An outflow of cash on trade payables had accounted for the bulk of the fall.

The company is paying an interim dividend of 1.1 Singapore cents, unchanged from a year ago. However, the dividend represents a dividend pay-out ratio of 61.1% as compared to 44.5% last year. In its earnings release for the third quarter of 2013, Challenger Technologies said that it will pay out at least 50% of its net profit as dividends for that year, 2014, and 2015.

Despite the drop in profit for the first half of 2014, the company may be pressured into paying too much in the form of dividends to meet its earlier promise. The cash that’s paid out as dividend might be needed for daily operations. In any case, a climbing pay-out ratio also generally equates to a dividend that’s less safe, so this is something that investors might want to keep an eye on.

While Challenger Technologies’ struggling with a tougher retail environment for its business, it appears unlikely that the company would be changing course any time soon. In the company’s latest earnings release, Loo commented that the “IT lifestyle retail business in Singapore remains [Challenger Technologies’] strength as well as [its] main focus.”

Following the company’s less than ideal set of numbers, investors have to ponder a few questions.

Despite what Loo had said just above, investors have to discern if the IT market for Challenger Technologies is saturated in Singapore with the company already operating a total of 35 Challenger stores; international expansion hasn’t been a fruitful route for the company’s growth either given its Malaysian store closures. Also, how far more can Musica and Valore stores grow in tiny Singapore, especially with rising rental and staff costs? Are the products of Valore well-made given some quality issues recently? Valore seems to be competing on price with established brands; unless its products are of higher quality and/or significantly cheaper, consumers may not be enticed to buy from it.

Shares of Challenger ended the week at S$0.49, down 3% from Thursday’s close (the day of its earnings release). Its dividend yield stands at 5.1%.

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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 contributor Sudhan P doesn’t own shares in any companies mentioned.