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27-12-2010, 09:43 PM
Hi all,
Just came by this board and I’ve already learnt a lot. I just feel that I needed to give something back. I’ve recently done a more in depth analysis for Challenger. I threw some money at it for the great dividend and low price last year and the company did very well by me. I’m currently rebalancing my portfolio and took a harder look at this stock. I also want to take the opportunity to get my value based analysis critiqued by you guys. Just in case I missed anything out.
Here are the results. Cavear Emptor, obviously.
Competitive Advantage Analysis
Challenger is in a very interesting portion of the business. If you consider the retail business, obviously Challenger is just one player in a huge field. However, since Challenger sells mainly IT/Electronics goods, you can consider Challenger to be in the IT retail business and it is a major, if the the dominant, player in that business.
Challenger is a large island-wide chain and it serves as a one-stop shop for everything IT/Electronics related. It is very well known and its stores are in excellent locations. In this regard, Challenger is unique.
I find it difficult to think of a competitor to Challenger. Some may say that Challenger competes against the Sim Lim Square (SLS) as a one stop destination for IT goods. Here is the competitive analysis against SLS:
1) Challenger stores are much more local and more easily accessible than SLS
2) Challenger provides after sales service and has a better reputation for service than SLS
3) SLS is cheaper than Challenger but not by much (5% - 10%)
4) SLS is fragmented and cannot achieve economies of scale achieved by Challenger
Challenger and SLS are two quite different ends of the market. While SLS shops best serve the savvy consumer who go there to buy the bleeding edge goods at lower prices, Challenger serves the general public who don’t want to go to SLS or don’t know what to do at SLS. The price advantage of SLS disappears when one does not want to travel halfway across the island or when one buys small products.
The most important difference is that you can’t really invest in SLS. The closest competitor on the stock market I managed to think of was Harvey Norman (Pertama Holdings). It isn’t a very good comparison since Harvey Norman is best known for their white goods and not their IT section. I only used Harvey Norman for a Fundamentals comparison which will be dealt with in the next section.
Fundamentals
Whenever I do funamentals analysis, I always try to find an equivalent stock. In this case I chose Pertama which, once again, is not a very good stock to compare Challenger against. However, its the best I managed. Both are large island-wide chains with interests overseas.
1) PE
Pertama PE: 12.65
Challenger PE: 8.53
A PE below 12 is when I begin looking at a company. Challenger is much cheaper than Pertama but this is a bit of an anomaly. While Pertama PE hovered around 15 (which is a value I consider a good stable and fairly valued company should be at) Challenger’s PE plunged due to a large spike in EPS from 2008 to 2009. They haven’t released the 2010 Annual Report yet and we’ll see how they do.
2) ROE
Pertama ROE: 8.45%
Challenger ROE: 42.06%
This is where we see the divergence in the companies. Challenger is growing at a ridiculous rate. Over the past few years it has averaged at about 30% ROE while Pertama hovers at about 7.5%. I’m really happy that management has managed a >20% ROE even during the crisis. While Challenger is certainly not recession proof, it shows that the chain can weather a recession pretty well.
3) ROA
Pertama ROA: 5.6%
Challenger ROA: 20.5%
I use ROA to determine that the company doesn’t have too much liabilities on hand. I find this to be a better gauge than merely looking at long-term debt. If ROA falls off a cliff, it indicates that the company has a large amount of liabilities (current or otherwise) that may be worth a look at. In this scenario, Challenger’s return has been reduced by half, so it must have a large amount of liabilities somewhere.
Digging through the balance sheets, we find that Challenger has a large amount of current liabilities which are mainly in the current payables. This looks to be consistent with the previous years and so nothing out of the ordinary. However, it is very impressive that Challenger can consistently generate a ROA of about 20% (it was 10% in 2008). This handily beats most companies I’ve seen, including Pertama.
4) Earnings Growth
Pertama: 35%
Challenger: 108%
I don’t really like this ratio since it can provide very skewed numbers. However, Challenger has managed to pull itself up from a difficult year with a bang. Pertama has done so as well, but with numbers that aren’t as eye catching.
5) Yield
Pertama: 7%
Challenger: 6%
Pertama is a cash cow. It is fairly stable and distributing a good amount of its cash to the investors. This is one of the main reasons why I don’t mind its ROA being so low. It’s not meant to be a growth stock.
Challenger on the other hand is a very interesting stock. It’s ROA is quite high and it still manages to distribute a sizeable dividend. I will take a look at 2010s annual reports once they are out to see whether this type of performance is sustainable. Retail firms don’t have a large amount of required capex, but I wonder if the high yield, high growth fundamentals can be maintained.
Management Analysis
Challenger’s management been clear about their expansion plans and they have pursued it really well. Challenger is moving into well connected malls in large housing estates to provide the local populace a one-stop location for IT products. They have recently opened a shop in Sembawang and have just secured leases to places in Sengkang and Clementi.
I also personally believe that Singapore is a fairly small market and whatever niche a company finds to sell to, that segment will saturate quickly. Companies must look overseas and Challenger has recently begun to do so. They have recently secured a lease to a location in KLCC which is one of the largest malls in KL.
Management is doing very well and it looks like Challenger is well positioned for the next few years. I believe that the Singapore market will be saturated soon so we’ll see how the Malaysian adventure pans out.
Valuation
One of the most difficult parts of this analysis for me is valuation. A stock can be good, but if the whole market knows, then the stock will most likely be priced out of my reach.
I’ve used a simple DCF valuation with a 11% discount rate and a conservative 5% growth rate. I’ve determined that the stock is is fairly valued at $0.55.
Final Summary
Challenger is an excellent stock to own and I purchased a large amount back when it was at $0.38. I may purchase more depending on the 2010 Annual Report.
Points to take note
1) Excellent fundamentals. Making money hand over fist is always good.
2) Overseas expansion. This will be what makes or breaks the company. The initial foray into Malaysia looks profitable, and I will certainly ask management how the Malaysian stores are continuing to perform at the next AGM.
3) Investment for the next 5 years. I think Singapore will be saturated in the next 5 years. So far, Challenger is doing a good job of finding new and heavily traversed locations to set up shop. Once they start opening another shop near existing ones, I’ll start worrying.
I hope this analysis helps, and I would like to hear any comments on the analysis I did. I’m currently looking at a new sector to invest in and any improvements to my value analysis will be much welcomed. Caveat emptor, and may we all make money together!
Just came by this board and I’ve already learnt a lot. I just feel that I needed to give something back. I’ve recently done a more in depth analysis for Challenger. I threw some money at it for the great dividend and low price last year and the company did very well by me. I’m currently rebalancing my portfolio and took a harder look at this stock. I also want to take the opportunity to get my value based analysis critiqued by you guys. Just in case I missed anything out.
Here are the results. Cavear Emptor, obviously.
Competitive Advantage Analysis
Challenger is in a very interesting portion of the business. If you consider the retail business, obviously Challenger is just one player in a huge field. However, since Challenger sells mainly IT/Electronics goods, you can consider Challenger to be in the IT retail business and it is a major, if the the dominant, player in that business.
Challenger is a large island-wide chain and it serves as a one-stop shop for everything IT/Electronics related. It is very well known and its stores are in excellent locations. In this regard, Challenger is unique.
I find it difficult to think of a competitor to Challenger. Some may say that Challenger competes against the Sim Lim Square (SLS) as a one stop destination for IT goods. Here is the competitive analysis against SLS:
1) Challenger stores are much more local and more easily accessible than SLS
2) Challenger provides after sales service and has a better reputation for service than SLS
3) SLS is cheaper than Challenger but not by much (5% - 10%)
4) SLS is fragmented and cannot achieve economies of scale achieved by Challenger
Challenger and SLS are two quite different ends of the market. While SLS shops best serve the savvy consumer who go there to buy the bleeding edge goods at lower prices, Challenger serves the general public who don’t want to go to SLS or don’t know what to do at SLS. The price advantage of SLS disappears when one does not want to travel halfway across the island or when one buys small products.
The most important difference is that you can’t really invest in SLS. The closest competitor on the stock market I managed to think of was Harvey Norman (Pertama Holdings). It isn’t a very good comparison since Harvey Norman is best known for their white goods and not their IT section. I only used Harvey Norman for a Fundamentals comparison which will be dealt with in the next section.
Fundamentals
Whenever I do funamentals analysis, I always try to find an equivalent stock. In this case I chose Pertama which, once again, is not a very good stock to compare Challenger against. However, its the best I managed. Both are large island-wide chains with interests overseas.
1) PE
Pertama PE: 12.65
Challenger PE: 8.53
A PE below 12 is when I begin looking at a company. Challenger is much cheaper than Pertama but this is a bit of an anomaly. While Pertama PE hovered around 15 (which is a value I consider a good stable and fairly valued company should be at) Challenger’s PE plunged due to a large spike in EPS from 2008 to 2009. They haven’t released the 2010 Annual Report yet and we’ll see how they do.
2) ROE
Pertama ROE: 8.45%
Challenger ROE: 42.06%
This is where we see the divergence in the companies. Challenger is growing at a ridiculous rate. Over the past few years it has averaged at about 30% ROE while Pertama hovers at about 7.5%. I’m really happy that management has managed a >20% ROE even during the crisis. While Challenger is certainly not recession proof, it shows that the chain can weather a recession pretty well.
3) ROA
Pertama ROA: 5.6%
Challenger ROA: 20.5%
I use ROA to determine that the company doesn’t have too much liabilities on hand. I find this to be a better gauge than merely looking at long-term debt. If ROA falls off a cliff, it indicates that the company has a large amount of liabilities (current or otherwise) that may be worth a look at. In this scenario, Challenger’s return has been reduced by half, so it must have a large amount of liabilities somewhere.
Digging through the balance sheets, we find that Challenger has a large amount of current liabilities which are mainly in the current payables. This looks to be consistent with the previous years and so nothing out of the ordinary. However, it is very impressive that Challenger can consistently generate a ROA of about 20% (it was 10% in 2008). This handily beats most companies I’ve seen, including Pertama.
4) Earnings Growth
Pertama: 35%
Challenger: 108%
I don’t really like this ratio since it can provide very skewed numbers. However, Challenger has managed to pull itself up from a difficult year with a bang. Pertama has done so as well, but with numbers that aren’t as eye catching.
5) Yield
Pertama: 7%
Challenger: 6%
Pertama is a cash cow. It is fairly stable and distributing a good amount of its cash to the investors. This is one of the main reasons why I don’t mind its ROA being so low. It’s not meant to be a growth stock.
Challenger on the other hand is a very interesting stock. It’s ROA is quite high and it still manages to distribute a sizeable dividend. I will take a look at 2010s annual reports once they are out to see whether this type of performance is sustainable. Retail firms don’t have a large amount of required capex, but I wonder if the high yield, high growth fundamentals can be maintained.
Management Analysis
Challenger’s management been clear about their expansion plans and they have pursued it really well. Challenger is moving into well connected malls in large housing estates to provide the local populace a one-stop location for IT products. They have recently opened a shop in Sembawang and have just secured leases to places in Sengkang and Clementi.
I also personally believe that Singapore is a fairly small market and whatever niche a company finds to sell to, that segment will saturate quickly. Companies must look overseas and Challenger has recently begun to do so. They have recently secured a lease to a location in KLCC which is one of the largest malls in KL.
Management is doing very well and it looks like Challenger is well positioned for the next few years. I believe that the Singapore market will be saturated soon so we’ll see how the Malaysian adventure pans out.
Valuation
One of the most difficult parts of this analysis for me is valuation. A stock can be good, but if the whole market knows, then the stock will most likely be priced out of my reach.
I’ve used a simple DCF valuation with a 11% discount rate and a conservative 5% growth rate. I’ve determined that the stock is is fairly valued at $0.55.
Final Summary
Challenger is an excellent stock to own and I purchased a large amount back when it was at $0.38. I may purchase more depending on the 2010 Annual Report.
Points to take note
1) Excellent fundamentals. Making money hand over fist is always good.
2) Overseas expansion. This will be what makes or breaks the company. The initial foray into Malaysia looks profitable, and I will certainly ask management how the Malaysian stores are continuing to perform at the next AGM.
3) Investment for the next 5 years. I think Singapore will be saturated in the next 5 years. So far, Challenger is doing a good job of finding new and heavily traversed locations to set up shop. Once they start opening another shop near existing ones, I’ll start worrying.
I hope this analysis helps, and I would like to hear any comments on the analysis I did. I’m currently looking at a new sector to invest in and any improvements to my value analysis will be much welcomed. Caveat emptor, and may we all make money together!
