Sunday, 3 September 2017

Is Tai Sin's FY17 Results a Cause for Concern?


Tai Sin Electric has been one of my long-term shareholdings since 2012/2013. Lets take a look at its latest Financial Year results that has just been released not long ago.

Overall P&L
Tai Sin has not had a great year in FY17. The total revenue, gross profit and operating profit have decreased as seen in table above.
As a cable and wire manufacturer, it is important to monitor copper price as it is the main raw materials for cable production. Tai Sin showed ability to navigate a rising copper price in last year by maintaining a constant gross profit margin at 20.6%.

But operating margin did not fare as well and we have a decreased operating margin in FY17.


Segment Revenue Breakdown

The largest business segment, Cable & Wire, suffered a 19.3% fall in revenue. In fact its $41.9m revenue reduction is more than the fall in overall revenue amount (see table above): $41.2m.

The second largest segment, Electrical Material Distribution, had higher revenue but its too small an amount to cushion the lower revenue in Cable & Wire.


Balance Sheet

Tai Sin is still in a net cash position with $22m of cash and $10m of short term borrowing. It is worth noting that short term borrowing decreased from $36.9m the previous year.
Trade receivables decreased by 21% compared to FY16.

Nothing unusual here.

Cashflow

The net cash from operations jumped from $8.4m to $37.4m in FY17. Looking at the changes in working capital, the line item with big change is the collection of trade receivables: $18.9m in FY17 versus -$21.2m in FY16.

Management’s comment as follow:

‘The net cash from operating activities of $37.42 million was mostly due to lower sales, lower purchases, lower bonus accrued, payment of gratuity and income tax during the year’

Management seems to have a negative view about the increase in ops cash flow and attributed it to lower business activities that leads to lower sales on credit and less cash bonus payment.

Nevertheless, it’s still a happy problem for Tai Sin that its main operation is highly cash generative, enabling it to pare down debts, acquire other companies or simply to maintain its dividends payment.

My Opinion

Its clear that the business environment has been difficult in the past one year based on the lower revenue and income. Management cited that this is due to ‘lower delivery to the Commercial & Residential, Industrial and Infrastructure Sectors as a result of completion of deliveries for the existing contracts.’

In my memory, such a narrative of a slowing residential, commercial and industrial sectors doesn’t seem to be new. When I looked back at annual reports since FY13, Tai Sin had voiced similar warning about the slowdown in local construction activities and sluggish economic performance affecting its top-line, and the only bright spot in the industry is the government-initiated infrastructural projects.

Yet the company had actually performed rather consistently. Its revenue and net income has been hovering around a tight band of $280m - $320m, and $20m - $27m respectively.

It seems that while Tai Sin is clearly aware of the industry challenges and been managing shareholders’ expectations by stating them explicitly, it has also done a good job keeping its business afloat.  

And looking at the local construction and civil engineering landscape, there is no shortage of projects especially infrastructural developments initiated by the government e.g. new MRT lines, T5, Tuas port. HDB flats are still being built on a large scale, with new residential areas in the pipeline such as Tengah.

While the industry is fragmented with small players, there is a market for Tai Sin’s product. It being a market leader, and with years of experience, should have no issues maintaining a stable revenue in a boring industry, barring a severe industry and economic downturn.

From a portfolio perspective, I bought Tai Sin as a dividend play to provide cash inflow. My yield on cost for this counter is a comfortable 9.8% based on dividend per share of $0.0235. Assuming Tai Sin is going to pay out dividends of $10.2m as per last year, it is well below the net operations cashflow of $37m.

Hence, I am not worried about Tai Sin’s reduced revenue and earnings. However, it would be a cause of concern if the results drop again next year. I shall monitor its quarterly report closely.

As of now, it should continue to sit in my portfolio and dispense cash to me twice yearly.

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