Challenger Technologies Limited’s Latest Earnings: Dividends Up, But Can it Be Sustained?

On Monday evening, Challenger Technologies Limited (SGX: 573) released its financial results for the quarter and year ended 31 December 2015 (FY2015).

Challenger Technologies Limited is an IT (information technology) products and services provider with a total of 48 retail outlets in Singapore. The company’s namesake Challenger stores may be a familiar sight for many Singaporeans. Challenger Technologies used to operate in Malaysia as well, but has recently closed down its operations there.

With the above as some background for context, let’s take a look at the company’s latest earnings.

Financial highlights

  1. For the year, revenue had inched down slightly by 1% to $352.2 million. For the reporting quarter, revenue was down by 9% year-on-year to S$95.6 million.
  2. Net profit attributable to shareholders grew by 23% to $18.2 million for 2015. For the fourth-quarter, the self-same figure had surged by 55% to $7.6 million from a year ago.
  3. Consequently, earnings per share for the year was at 5.29 Singapore cents, up 24% from 2014. Earnings per share had grown by 55% to 2.22 cents for the reporting quarter.
  4. Despite the high profit figures, cash flow from operations in 2015 tumbled by 78.8% from S$23.7 million a year ago to just S$5.0 million. With capital expenditures of S$3.1 million, free cash flow for 2015 was a mere S$1.9 million. In 2014, Challenger Technologies had produced a much healthier free cash flow of S$16.5 million.
  5. As of 31 December 2015, Challenger Technologies had a cash hoard of S$41.7 million on its balance sheet. A year ago, the cash balance was higher at S$52.6 million. The firm had no debt in both years.

Business highlights

The lack of revenue growth in 2015 had been chiefly due to lower contribution from the firm’s stores in Singapore and the absence of revenue arising from the closure of its operations in Malaysia in the second half of 2014. These were slightly offset by higher sales from corporate clients and a write back of deferred revenue on loyalty programme activities.

Net profit for the year had grown mainly due to higher government grants received and lower operating expenses as a result of ceased operations in Malaysia.

Shareholders will be given a final dividend of 1.55 Singapore cents per share for the reporting quarter. This is a 24% increase from the final dividend of 1.25 cents per share in the fourth-quarter of 2014. Including the interim dividend of 1.10 cents for 2015, a total of 2.65 cents in dividend would have been paid out by Challenger Technologies for the year. This compares with a total dividend of 2.35 cents per share in 2014.

An outlook ahead

In the earnings release, Challenger Technologies commented that it “expects the retail industry to be challenging” given the “current uncertain economic and business conditions.” The company’s plan to handle these challenges would be to rationalise under-performing stores and improve both its inventory management and sales mix.

There is expected to be a “brand-new online market place” by Challenger Technologies in the second-quarter of 2016. The company’s intention is for the market place to widen its customer base and complement its brick-and-mortar retial stores. The company also has plans to open more retail stores to grow its online-to-offline sales strategy.

As a reminder, Challenger Technologies has 48 stores in Singapore currently. Two more – in Tiong Bahru and Sengkang – will be added to the network in the second-half of 2016.

Foolish Bottom-line

The increase in Challenger Technologies’ dividend seems impressive but is it sustainable going forward? The firm, as mentioned earlier, had produced just S$1.9 million in free cash flow in 2015. It seems that the company has to dip into its cash reserves of S$42 million to pay its final dividend.

Moreover, as mentioned, the company has different plans to grow its business (including beefing up its online presence) and these will require cash. It is therefore more prudent, in my view, for any free cash flow that’s generated to be first pumped back into the business; higher dividends can be considered if there is any surplus free cash flow.

We will only know in 2016 if Challenger Technologies’ dividend can be sustained.

Shares of the company ended Monday’s trading session at S$0.405. It is valued at 9 times trailing earnings at that price and has a trailing dividend yield of 6.5%.

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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.