PNE Industries - CGS-CIMB Research 2019-09-23: Low Leverage, Strong Dividend Track Record

PNE INDUSTRIES LTD (SGX:BDA)

PNE Industries - Low Leverage, Strong Dividend Track Record

PNE Industries is a contract manufacturer specialising in electronic controllers and exit lighting.
The group has been in a net cash position with zero debt for the past five years. PNE Industries has also been paying dividends during this period.
PNE Industries currently trades at a historical FY9/18A P/BV of 0.79x and a historical dividend yield of 7.89%.

PNE INDUSTRIES LTD (SGX:BDA) has been listed on the Singapore Stock Exchange (SGX) since May 2000. Its core business comprises contract manufacturing (manufacturing of electronic controllers and other electrical and electronic products) and trading (manufacturing and trading of emergency lighting equipment and related products).
PNE Industries is headquartered in Singapore with sales offices and/or manufacturing facilities located in Singapore, Malaysia, China and the Netherlands.

An increasing number of electrical appliances are now equipped with intelligent features made possible by the use of microprocessors or by connecting to the Internet. PNE develops electronic controllers incorporating such intelligent features in collaboration with its customers.
PNE Industries manufactures smart home-lighting devices with Internet of Things (IoT) features for a leading European lighting company. This allows users to control their lights over the Internet. The group also manufactures personal handheld medical scanning devices as well as energy management systems with IoT features.

Emergency lighting equipment is a type of lighting equipment that turns on or remains on when a power failure occurs. One such type of emergency lighting equipment is the Exit sign. Exit signs are self-lit signage installed in buildings to show occupants the direction and location of emergency escape routes and/or exits.
PNE Industries designs, manufactures and distributes a wide range of emergency lighting equipment, including those for indoor use or outdoor use under its own PNE brand.

In FY18, PNE Industries's contract manufacturing segment accounted for 87% of revenue while the trading segment accounted for 13% of revenue. In terms of operating profit, 68% of operating profit was derived from the contract manufacturing segment. The trading segment accounted for 28% of operating profit. The contract manufacturing segment generated an operating profit margin of 5.9% in FY18 while the trading segment’s operating profit margin was 15.7%.
In terms of PNE Industries's revenue breakdown by the geographical location of its customers, Europe (excluding Poland and Hungary) accounted for 39% of FY18 revenue. The next biggest contributor to FY18 revenue was Poland at 21% of FY18 revenue followed by China at 12%.

In FY17, two major customers accounted for 64% of PNE Industries’s contract manufacturing segment’s sales.
In FY18, three major customers accounted for 72% of contract manufacturing segment’s sales. Each of the three major customers accounted for more than 10% of the group’s FY18 revenue. These three customers collectively accounted for 62.5% of the group’s FY18 total revenue.

In FY14, PNE Industries reported a one-off S$9.8m gain on disposal of interest in an associate and in FY16, PNE Industries recorded a one-time S$6.7m gain arising from the disposal of the group’s subsidiary, PNE Print Technology Co Ltd.

PNE Industries has been in a net cash position with zero borrowings for the past five years. As at end Jun-2019, its net cash (excluding investments in financial assets) was S$31.3m (S$0.37 per share). This represents 49% of its share price of S$0.76 on 20 Sep 2019. See PNE Industries share price; PNE Industries dividends.
PNE Industries has also been paying dividends for the last five years. Based on its past five years’ historical financials, PNE Industries’s capex has been minimal.

In 9MFY9/19A, PNE Industries’s revenue rose 37.4% y-o-y and net profit jumped 135.0% y-o-y to S$5.7m. As at end-9M19, PNE Industries’s net profit exceeded FY18A’s net profit of S$5.3m.

Based on the closing price of S$0.76 on 20 Sep 2019, PNE Industries is also trading below its net-net value of S$0.83 per share (as at end-Jun 2019).
Net-net is a value investing technique developed by Benjamin Graham in which a company is valued based solely on its net current assets. Benjamin Graham was a British-born American investor, economist, and professor who is widely acknowledged as the father of value investing. The net-net investing method focuses on current assets, taking cash and cash equivalents at full value, then reducing accounts receivable for doubtful accounts, and reducing inventories to liquidation value. Total liabilities are deducted from the adjusted current assets to get the company's net-net value.
Note that in our calculation of the historical numbers, we have not applied any discount to the items classified under the current assets.

William TNG CFA CGS-CIMB Research | https://www.cgs-cimb.com 2019-09-23

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