Listed on SGX since May 2000, PNE Industries is a manufacturing company that is active in two segments; Contract manufacturing & Trading of emergency lighting equipment. This is a company that is cash rich, has a history of paying handsome dividends, profitable, strong cash flow generation and trading at a discount to its net current asset value.
As mentioned in the introduction above, the company and its subsidiaries operate mainly in two business segments – contract manufacturing and trading. Under contract manufacturing, they sell products which include electronic controllers and other electrical and electronic products. These products are tailor made to each customer’s required specifications. For trading, the type of products sold include emergency lighting equipment and related products. These products are manufactured for the mass market based on general specifications.
Profile of Board Members
Looking at the lineup of the board, it is obvious that the Tan family controls the business. I have also attached the inside ownership below. Almost every name in the top 20 shareholders of the company is part of the Tan family. I suspect there is more, just that their stake is not enough to be part of the top 20. Although a large number of family members own these shares, not all are part of the management. Only 38% of the shares are held by the directors.
Total remuneration for the directors is about S$1.57mil this FY. This translates to about 28% of net profit attributable to shareholders, which is quite high. However, looking at how much they are paid individually, the amount seems fair. I guess they have to buck up and improve on their performance to justify the remuneration they are getting. I would also like to point out that 71% of Tan Koon Chwee and Tan Kong Leong’s salary is fixed and only 25% is based on variable performance. In my opinion, the mix should be somewhere around 50% / 50%. This would ensure that they do not slack and work hard to maximise the value of the shares.
For the year ended 30 Sep 2018, PNE recorded revenue of S$79.8mil, a 11% decrease from S$89.8mil in 2017. Management states that this is due to lower contract manufacturing sales, offset by higher trading sales. Profit also decreased by 50% from S$10.3mil to S$5.3mil.
Cash flow remains strong with S$6.5mil cash generated from operating activities, which also led to increase of S$1.2mil in cash and bank balances.
Revenue has been stable for the past 5 years between S$70-90mil. Same goes to their EBITA and Gross Profit. There was a spike in EBITA in FY2016 due to the divestment of their printing business which they book a one time gain of S$6.7mil. It was a pretty disappointing FY2018 for them as their revenue and net profit decrease by a substantial amount.
What I like most about PNE is their solid balance sheet. Looking at their assets, most of it is cash while they have no interest bearing debt. From their balance sheet, they also looking to dispose of their 13.9% interest in loss making PNE PCB Berhad, listed on the Malaysian stock exchange.
Cash Flow Statement
Their cash flow from operations translates to their free cash flow. They also have very low capex. However, due to poor performance, their cash flow generation has also decreased over the years. Another good point to note is that they have positive free cash flow generation for the past 5 years.
Financial Ratios and Valuations
PNE’s tangible book value stands at $0.96, compared to their current share price, it is trading at 0.8x. Their cash holdings is about S$0.44 per share, which provides a huge margin of safety at current price levels. Dividend yield is also very attractive at 6.5%. Total dividends paid for FY2018 is S$5mil, which also means their payout ratio is at 80%. PE ratio is high at 12.8x but if you look at ex-cash, their EV/EBIT ratio is only at 4.3x, which is very cheap (usually below 7x is considered cheap. I will discuss on this in my later posts). ROE and ROA is at 6.55 and 5.14 respectively. I would consider ROE of above 10% to be very attractive business to invest in but 6.55 is still respectable in my opinion
Let me share with you an article that would dispel the perception that PNE is in a sunset industry. The current Asia Pacific emergency lighting market is valued at around S1.2B and is expected to advance at CAGR of 10.1% from 2019 to 2024. The article also mentions PNE as one of the key suppliers for emergency lighting.
As for the printed board circuits, PNE manufactures smart home lighting devices with IOT features for a leading European lighting company. They are also involved in manufacturing of other devices incorporating IoT features like medical scanners, energy management etc etc.
The new generation of devices will have to handle greater user expectation on quality of connection and coverage. The growing importance of electronic products in various applications and industries today is evident as electronic products today play an important role among consumers. Not forgetting the rapid technological advancements in electronic products will see consumers highly receptive towards new products especially mobile phones and wireless devices. These products are also experiencing relatively shorter life cycles.
I believe that being part of the IoT environment will enable them to explore new opportunities to expand their business.
Based on the above evaluation of the business, I think that PNE is too cheap to ignore. The have a large cash holding and consistent positive free cash flow generation. They have a long history of paying dividends. Hopefully their performance will improve but at current levels, their dividend is still sustainable.
I guess the reasons for their low valuation is due to their shares being family controlled, where 38% is held by the management. Hence, I believe that they will strive to maximise value for their shareholders, a plus point would be different family members owning the shares would deter them from doing things that will be detrimental to their company.
PNE has net cash of $0.44 and giving its business a PE multiple of 8x (EPS of $0.06), I arrive at a valuation of $0.92. At current price levels, I feel that there is sufficient margin of safety to invest in this company. Any deterioration of the business will affect my valuation of this company.
Note: Moss Piglet is currently vested with an average price of $0.90