Challenger Technologies

[felixleong]

Yeah I think they are expanding at quite a decent rate, not too fast but at a pace I am comfortable with.

They also have the discipline to close down some stores that are not so attractive.

The improvement of ROA is a good sign.

[CityFarmer]

Dupont breakdown is important for new investors to have a gauge of their return on capital deployed.

But for intrinsic earning power, long term value investors should look at ROA as better guage, which is just your Dupont formula divided by leverage, or simply NPM X Asset Turn. But nothing beats the grunt work of analysing the cashflow returns in detail and understanding the business, unless you are a quant guy

Well said. Fully agreed especially the "nothing beat the grunt work of analysing the cashflow returns in detail and understanding the business"

To add-on base on the context of Challenger Tech.

Challenger Tech is an asset light company with a near zero CCC. The ROA is depressed by the cash hoard due to depressed asset turn.

A simplified illustration:
Working capital = current asset - current liability = S$41 million (FY2012)
and
Cash hoard = S$42 million (FY2012)

So the ROA (ex-cash) should be 33.6%, instead of 17.9%

[dydx]

There is little doubt that competition in the still growing IT retailing sector has been increasing over the last few years. This is evident from Challenger's gradually falling overall group-level GP Margin, which has fallen further to a still respectable 18.9% in FY12, from 19.1% in FY11.

Increasing retail rents have also affected Challenger's overall profitability over the years, and this is evident from Challenger's gradually increasing Rental/GP % Ratio, which has risen further to 19.4% in FY12, from 18.6% in FY11.

As Challenger's NP has been increasing steadily year-after-year - itself a reliable confirmation of CEO Loo's superb management skills, drive and successful effort to expand the core retail business, including into West Malaysia - the fall in ROE in FY11 and FY12 was also affected by the decision to retain a greater portion of NP earned in the last 2 FYs, which has raised NAV by approx. $16.8m, to reach $51.06m as at 31Dec12. If we factor out $30.0m - my own estimate for the amount of excess capital/cash not really required to support Challenger's already very well-established cash sales operation - from the $42.1m cash reserve as at 31Dec12, the adjusted ROE for FY12 would be a super-high 76.9%! Isn't Challenger's retail business - which based on its present modus operandi can essentially just rely on suppliers' normal trade credit to grow - a wonderful one?

[specuvestor]

I actually don't agree with excluding cash in calculation unless there is incentive for mgt to return the cash. And most of the time we are passive, yet hopeful that our "lover" will finally turn around and love us back

Otherwise cash is cash for a variety of reasons: for non-existance as in S-chips to value traps as exiting business is bleeding, to working capital window dressed at quarter end, to potential M&A or certain mgt preference to use the cash for eg to buy CDO or unit trusts , to inefficient capital allocation and complacent attitude of managers, like the TLCs in the past.

That's why Buffett gauge their managers on capital efficiency. Any unnecessary capital is sent to Berkshire.

For us mortal investors, our capital is stuck in the company we invest which hoards the cash. Our ROIC cannot be calculated based on ex cash unless you control the company. Ironically the model for Graham capital management is like REITS: full payout and rights issue when cash is needed. Unfortunately like some forumer pointed out, we need to calculate the net cashflow from the rights and the dividends, else it is little difference to Geneva Gold

[CityFarmer]

I actually don't agree with excluding cash in calculation unless there is incentive for mgt to return the cash. And most of the time we are passive, yet hopeful that our "lover" will finally turn around and love us back

Otherwise cash is cash for a variety of reasons: for non-existance as in S-chips to value traps as exiting business is bleeding, to working capital window dressed at quarter end, to potential M&A or certain mgt preference to use the cash for eg to buy CDO or unit trusts , to inefficient capital allocation and complacent attitude of managers, like the TLCs in the past.

That's why Buffett gauge their managers on capital efficiency. Any unnecessary capital is sent to Berkshire.

For us mortal investors, our capital is stuck in the company we invest which hoards the cash. Our ROIC cannot be calculated based on ex cash unless you control the company. Ironically the model for Graham capital management is like REITS: full payout and rights issue when cash is needed. Unfortunately like some forumer pointed out, we need to calculate the net cashflow from the rights and the dividends, else it is little difference to Geneva Gold

From the perspective of accessing investment return of a company, than you are right, cash should be included in the assessment, with no foreseeable return of excess cash from management.

From the perspective of accessing the merit of a business model, base on metrics of ROA/ROE/ROIC, then we need to "moderate" distortion from un-necessary cash hoard.

[felixleong]

Challenger closed at a new high of $0.505 !!!
Huat ahhh~~~

But trading volume was really low


btw anyone of u guys here ever thought of its poor liquidity as an issue?

[felixleong]

I was reading challenger's 2012 annual report today and realize something interesting
CEO Mr Loo's salary is about 1 million dollars
but the dividends he receives annually is about 3 million dollars!

currently challenger's cash position is at 42 mil
with 345mil total shares, that's about 12 cents of cash per share~ ( please correct me if I am wrong )

considering the above two points, I do hope of a higher dividend payout in the near future ^^

I have been accumulating shares of challenger since 2010 till now

I was looking at the top 20 shareholder page and noticed a trend

over the years the top 20 shareholders as a whole been slowly increasing their stakes in challenger too

In 2010 the top 20 held about 88% of the company, in 2013 they now hold about 90%, I see it as a positive sign too.

[pianist]

impressive analysis

[CityFarmer]

Challenger closed at a new high of $0.505 !!!
Huat ahhh~~~

But trading volume was really low


btw anyone of u guys here ever thought of its poor liquidity as an issue?

Probably drum-up by buddies here with the last few postings

Liquidity is not an issue to me.

[specuvestor]

I actually don't agree with excluding cash in calculation unless there is incentive for mgt to return the cash. And most of the time we are passive, yet hopeful that our "lover" will finally turn around and love us back

Otherwise cash is cash for a variety of reasons: for non-existance as in S-chips to value traps as exiting business is bleeding, to working capital window dressed at quarter end, to potential M&A or certain mgt preference to use the cash for eg to buy CDO or unit trusts , to inefficient capital allocation and complacent attitude of managers, like the TLCs in the past.

That's why Buffett gauge their managers on capital efficiency. Any unnecessary capital is sent to Berkshire.

For us mortal investors, our capital is stuck in the company we invest which hoards the cash. Our ROIC cannot be calculated based on ex cash unless you control the company. Ironically the model for Graham capital management is like REITS: full payout and rights issue when cash is needed. Unfortunately like some forumer pointed out, we need to calculate the net cashflow from the rights and the dividends, else it is little difference to Geneva Gold

From the perspective of accessing investment return of a company, than you are right, cash should be included in the assessment, with no foreseeable return of excess cash from management.

From the perspective of accessing the merit of a business model, base on metrics of ROA/ROE/ROIC, then we need to "moderate" distortion from un-necessary cash hoard.

I'm sorry to be off topic here but for us mortal investor, when we buy a company we buy everything lock stock and barrel. Similarly we can't separate a good property A vs a lousy property B in a REIT and focus on the former saying ex-B I know this is a standard analyst methodology that makes no practical sense though widely used, and almost always give u a fantastic PE ex-cash because the market views it differently from the analysts.

This methodology however makes a lot of sense for vulture or LBO funds who can control the cash flows. Probably a methodology legacy of the Milken era of the 80s that has been applied indiscriminately.

I would be very keen to know from forumers what is the CATALYST for them to return cash soon vs say anytime past 3 years? OTOH I think the top20 info by felixleong is very interesting.