Tai Sin Electric Limited (“TSE”) has managed to continue delivering resilient results and provide stable dividend yield. On 14 February 2022, they have announced their first half year result ending 30 June 2022 results, which shows promises that the dividend yield is more than stable and worth considering for the long term.
Background
TSE is a Singapore-based investment holding company. The Company is engaged a cable and wire manufacturer and dealer in such products. Listed on the Stock Exchange of Singapore Catalist (formerly known as SESDAQ) in 1998, the Group was subsequently transferred to the SGX Main Board in 2005. Its operating segments include Cable & Wire (“C&W”), Electrical Material Distribution (“EMD”), Switchboard (“SB”), Test & Inspection (“T&I”).
TSE’s Cable business builds its success on the aggressive development and marketing of a comprehensive range of high quality cables through a distribution network serving a diverse range of industries, while maintaining strong partnerships with reputed consultants and main contractors. Working together, they provide competitive electrical cabling and wiring solutions for both the private and public sectors in all categories of industrial, commercial, residential and offshore & marine projects.
To cater for the robust growth in the regional market, TSE operates three cable manufacturing plants. They are located in Singapore, Malaysia and Vietnam, all of which are fully equipped with the latest manufacturing facilities and technologies to meet increasing demands.
TSE is strongly committed to making continual advancements in technology and innovation, both of which are their greatest strengths. Their ISO 9001, ISO 14001 and OHSAS 18001 certifications and conformity to various world-class standards are solid testimonies in their efforts to achieve excellent quality in both their manufacturing process and products.
Financial highlights
Revenue
Based on the FY2022 half year unaudited results announcement on 14 February 2022, it was noted the revenue increased by 30% to SGD174million in the first half of FY2022 compared to SGD134million from the previous financial year. If extrapolated to the full financial year, revenue is forecasted to be SGD349million, which will be a 17% increase from the prior year and also above the 6 year average of SGD310million since 2017.
The main increases are due to the Cable & Wire (“C&W”) and Electrical Material Distribution (“EMD”) Segments.
The C&W Segment’s revenue posted an increase of 34.05%, up SGD26.383million from SGD77.482million to SGD103.865million. The higher revenue arose from Singapore and Malaysia’s C&W segment, driven mainly by increase in copper prices and higher sales volume. The increase during the period was because of low base effects given the slow resumption of business activities after the Circuit Breaker Period (“CBP”) and Movement Control Order (“MCO”) in the first half of FY2021, the previous financial year.
The Electrical Material Distribution (“EMD”) Segment registered revenue of SGD52.987million, a growth of SGD11.854million, 28.82% higher than SGD41.133million in 1H21. The higher revenue from the Electronic Cluster and Building & Infrastructure Cluster was sustained by global demand for semiconductors and semiconductor equipment and resumption of construction activities.
This metric is a Favorable aspect of a dividend stock. It shows they are able to capitalize on the recovery from Covid-19 to generate higher revenue and also pass the rising costs on to their customers.
Earnings per share
Gross profit increased by 25% to SGD30 million for the first half of FY2022 compared to SGD24million in the previous financial year. If extrapolated to the full financial year, gross profit is forecasted to be SGD61million, which will be a 49% increase from the prior year and also above the 6 year average of SGD51million since 2017.
Despite the increase in gross profit margin, their net profit margin amounted to SGD8.6million for the first half of the financial year. If extrapolated to 12 months, the net profit margin annualized will be SGD17million, which represents a drop by 1% from the prior year.
Similarly. earnings per share will also fall by 1%.
The reason for the drop is due to in the prior financial year, there were government grants provided to alleviate the impact of Covid-19 which is absent in the first half of 2022. The forecasted Basic and Diluted earnings per share for FY2021 have decreased to SGD0.0370 per share (FY2021: SGD0.0370). As the earnings per share have not been severely affected, this is Favorable in view of the rising costs in the macro environment.
Operating Cash Flows
Operating cash flows have decreased to overall a net cash used in operating activities of SGD10.4 million in FY2022. If extrapolated it will be net cash used in operating activities of SGD20.8million, compared to net cash generated of SGD26 million in FY2021
Diving deeper into it, this was mainly due to an increase in inventory balances which resulted in an overall change in working capital due to inventory of SGD17million for the first half of FY2022. This is evidenced from the overall increase in inventory balances to SGD87million as at 31 December 2021, compared to SGD69million as at 30 June 2021.
Similarly, working capital due to trade receivables have also experienced a decrease by SGD9million, as evidenced by the increase in trade receivables to SGD96million as at 31 December 2021 compared to SGD87million as at 30 June 2021.
Management have highlighted that the increase in inventory balances were due to higher purchases towards period end. In my opinion, it may be a good sign to stock up on inventory at lower costs especially due to the rising inflation and supply chain disruptions, inventory may be more expensive in the future resulting in higher costs of sales.
Trade receivables increase were due to higher sales during the period. This can be evidenced with the increase in sales. However, the increase in trade receivables from third parties is something to keep an eye out for as may indicate in potential allowances for expected credit loss due to the receivables being uncollectible. Especially as the world economy enters into recession, many companies may start facing cash flow issues.
In my opinion, this metric is Neutral. Investors will need to keep an eye out in cash the company start experiencing cash flow issues in the near future.
Price-to-book ratio
Net Asset Value (“NAV”) of the Group as at 31 December 2021 also increased to SGD0.417 per share (FY2021: SGD0.413). Based on the closing share price of SGD0.390 as at 24 June 2022, this translates to a Price-to-book (“P/B”) ratio of 0.94. This is Favorable as it translates to paying a discount for TSE business.
Debt-to-equity ratio
Debt-to-equity ratio for the first half of FY2022 have increased to 58% as at 30 December 2021 compared to the previous financial year of 53%. It was worth nothing however this was due to the provision of onerous contract of SGD27 million. If excluding this amount, the debt-to-equity ratio will be 39%, which is not substantial change from the prior year.
Nonetheless, the provision for onerous obligations still represents possible future obligations, and we will need to keep an eye out for it. Furthermore, despite excluding the provision for onerous contract, the overall debt-to-equity ratio is noted to have increase from the prior years, which may be an indication of issues with working capital in the near future.
Coupled with the continued build up of inventory and trade receivable balances as at 31 December 2021, Nonetheless, this metric is Neutral as TSE can be seen to become more reliant on external sources to fund operations. However, with the profitable continuing operations, this can be lowered in the near future.
Computation as below:
Sustainable dividend yield
With the exception of 2020 due to Covid-19, TSE have been distributing relatively constant dividends of around SGD0.023 since throughout the years. Do note the difference in yield for 2022 is due to only SGD0.0075 dividend has been paid till date during the first half of 2022. The amount however is consistent with prior years.
Based on the closing share price of SGD0.390 as at 24 June 2022, this translates to a recurring dividend yield of 5.77%. In my opinion, this is sustainable in view of the earnings per share have been more than sufficient to cover the dividends paid out.
For a Company that is involved in the manufacturing business, this is a Favorable dividend yield, comparable with Real Estate Investment Trusts (“REITs”) whose mandates are to distribute majority of their earnings as dividends.
Insider Purchases
There has been consistent purchases, with the latest on 12 May 2022, by his wife and daughter of 278,000 shares at SGD0.39 per share.
As of my last post on 4 October 2021, Mr Lim’s total interest in Tai Sin Electric is 17.07%. This has been increased to 17.46% as at 12 May 2022.
This purchases signifies management’s confidence in the company, and that they believed the current share price to be undervalued.
Key things to note
Russia invasion of Ukraine
Russia’s invasion of Ukraine in February 2022 have resulted in major supply chain disruptions. The invasion creates barriers in the market, disrupting the movement of commodities like auto parts, oil, and grain. Moreover, this profound impact on our supply chains comes with attendant near weekly price increases, fueling the fires of inflation. As a result, most businesses and millions of consumers worldwide are feeling economic pain.
Although these have no direct impact, TSE still rely on global markets especially for sourcing of materials. Furthermore, it is difficult to say if their customer’s business operations will also be affected, which in turn lower their purchases from TSE.
Website: The Ukraine-Russia War’s Impact On The Supply Chain: Why MRO Optimization Is A Top Priority
Rising costs
Not only from the Russia invasion, Covid-19 continues to ravage the supply chain. Especially as there are still restrictions in place on transportation around the world. The result is that there is a continued shortage around the world which is causing inflation to rise in 2022.
Singapore being a country heavily reliant on the imports from overseas, is also affected by the inflation seen in other countries. With the major supply chain disruptions around the world and as seen from the provision for onerous contract, costs for the business are expected to rise as well.
Website: Singapore’s core inflation rises to 3.6% in May, highest in more than 13 years
Summary
In conclusion, TSE is a company with strong results along with sustainable dividend payouts. In view of the impact of Covid-19, TSE has proven itself to be a reliable defensive stock in today’s volatile market.
I believe the closing share price of SGD0.390 as at 24 June 2022 to be Undervalued, and the stock is a good option for those considering to add for its long term sustainable dividend payout. However, as inflation and supply chain disruptions is expected to continue for extended periods of time, investors do need to keep an eye out for any possible new moving forward relating to their operations. Notably, a possible significant increase to their cost of sales.
