The Motley Fool

Where to Next For Challenger Technologies? – Part I

Shares of Challenger Technologies Limited (SGX: 573) has outperformed for close to six years. The IT retailer’s shares are up 283% from 1 Jan 2009 to its closing price on 10 December 2014. During the same timeframe, the company distributed a total of about 13 cents per share in dividends (excluding share splits). By comparison, the capital gain returns of the SPDR STI ETF (SGX: ES3) was 79% for the same duration. The SPDR STI ETF is a proxy for the market barometer, Straits Times Index (SGX: ^STI).

While the shares of Challenger Technologies have been challenging new heights — as Foolish investors, we should look behind the curtain to understand its drivers of growth.

A closer look

The business of Challenger Technologies is fairly straight forward. Majority of its business is centred around its network of 44 stores around Singapore. It also has two other smaller business segments in electronic signage as well as telephonic call centre and data management services.

Challenger Technologies - 1

Source: Company Earnings Report

Challenger Technologies has managed to grow its revenue by a compounded annual growth rate of 15% from 2009 to 2013 (note: the financial year coincides with the calendar year). It’s pretty obvious from the graph above, that the majority of its revenue growth over the past five plus years comes from its IT products and services. This growth might have been driven by the increase in its network of stores from 23 stores in 2009 to 44 stores at the end of the third quarter of 2014. Additionally, the IT retailer has also increased its membership count from 280,000 in 2011 to 500,000 in 2013.

Challenger Technologies - 1

Source: Company Earnings Report

The graph above shows the revenue spread from a geographical perspective. The graph hints towards Challenger Technologies being a Singapore growth story so far. Unfortunately, the company has decided to wind down its Malaysian IT retail stores, so there might not be much visibility on the future of its overseas revenue growth.

Foolish summary

Challenger Technologies has done well in the past five years to grow its network of stores, and its membership count. It has also introduced with own house brand of products in a bid to compete with emerging threats such as online retailers. Unfortunately, it also had to close down its Malaysian stores, therefore there is no much visibility at the moment on how it can grow its store count beyond Singapore. Additionally, the retail outfit’s house brands may find it hard to compete with the more established product brands.

As of the closing price on 10 December 2014 of $0.46, Challenger Technologies traded at a trailing earnings ratio of about 11.2, and has a dividend yield of around 5.5% on a trailing twelve months basis.

The exercise above is to look at the sales alone. As a next step, we should observe if the topline growth trickles down to the bottom-line for it to sustain its growth in share price. That however, is for the next article.

For more (free!) stock analyses and investing tips, sign up here for your FREE subscription to The Motley Fool's weekly investing newsletter, Take Stock SingaporeIt will teach you how you can grow your wealth in the years ahead.

Like us on Facebook to follow our latest hot articles.

The Motley Fool's purpose is to help the world invest, better.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.