Challenger Technologies

[dydx]

After the recent 1-for-2 bonus issue, Challenger now has 345.208m issued shares outstanding, but with no warrants or stock options. Based on the last done share price of $0.42 (1Apr11), Challenger now has a market cap. of approx. $145m. The counter is now trading cum the $0.011/share FY10 Final dividend, payable on 31May11, with the 'XD' date fixed on 12May11.

Based on Challenger's FY10's NP of $13.663m (+24% yoy over FY09's $11.056m), Mr Market is now attaching a valaution based on a historical PER of 10.6x. As we can reasonably assume/expect Challenger to be able to grow its NP further by say +20% yoy, to approx. $16.4m in FY11, we can also say Mr Market is now attaching a valuation based on a prospective PER of 8.84x. By normal market norms, both cases can be considered acceptable, as Challenger has a well-established, growing business of a very high quality, together with consistent profitability.

Assuming Challenger keeps its FY11 dividend payout at minimum $0.019/share (as in FY10, adjusted for the recent 1-for-2 bonus issue), prospective dividend yield based on the last done share price is 4.52% p.a. However, based on Challenger's track record of increasing dividend payout over time, it is likely that FY11 will be no exception.

[redcorolla95]

While they have good growth, cashflow, dividends, Challenger does a couple of strange things.

Shop in Malacca
Good that they're trying to expand in Malaysia, with a 30,000 sf in Mines Shopping Fair in KL, in Jul 2008. Their next lease in Jun 2011 is in Malacca. This is not good. In population & spending power per head, there's much more in KL than Malacca, so a 2nd outlet in KL would both tap a larger market and get some economies of scale in distribution & operations.

Non-core project: electronic signage subsidiary
The business has $640k sales, loses money and they're paying someone $250k each year to run it just because he's been there for 21 years. This should be shut down if Challenger is run for shareholders.

Capital markets:
In Dec 2006, they had a rights issue to raise $4.4m, when the June balance sheet revealed $10m in cash. Clearly they didn't need the money.
The most recent stock bonus issue is another waste of time & money. While it could have a short term increase on liquidity, it does nothing to increase the welfare of long term shareholders. The pie is just being cut into more pieces. In some cases, liquidity for stock reduces the cost of debt, but management has been quite debt averse anyway.

One reason for the low valuation is the lack of data provided, although this is quite common to many listed companies in Singapore too. Specifically, information on some of these:
1. future plans
2. same store sales
3. total square footage
4. breakdown of spending: new stores, refurbishments etc
5. segments of items.
This is the sort of info that likes of the Walmart, McDonalds, etc put out regularly, and would be better for their investors than their recent capital markets activities. It helps answer the questions: how is the growth working out, and what are the future prospects.

[juno.tay]

Hi redcorolla,

hmm, thanks for pointing it out. I normally don't question Management decisions but the issue regarding the non-core business is valid.

I will try to bring it up during the AGM, hopefully get some answers from management.

I am pretty neutral on the bonus share issue since it didn't make me better or worst off. I still held the same percentage of the company as compared to before.

Thanks.

[bluechipstamp]

Non-core project: electronic signage subsidiary
The business has $640k sales, loses money and they're paying someone $250k each year to run it just because he's been there for 21 years. This should be shut down if Challenger is run for shareholders.

Let's look at the facts for the signage business:

[Image: signage.gif]

[redcorolla95]

Thanks for pulling out the nos.
Guess this means they should shut down the business?

[cif5000]

Guess this means they should shut down the business?

I am for keeping the business.

1. Challenger made $13.8m in FY10. The signage business on average is not losing the company money after paying for Chia's salary.

2. Chia has been with the group since the early years of Challenger. Loo probably hadn't dreamed of the scale that he achieves today when Chia and others were working hard for him. Those who have sticked together are indeed a core team. The group could have gone anywhere. Given another roll of the dice, the signage business might have been the one prospering.The human factor is not easily quantifiable and if it costs nothing for the shareholders to create a warm employment environment, I think it is worth it. Furthermore, you don't want a friend to turn into a foe.

3. The segment does not need heavy capex or other overheads.

[dydx]

The FY10 (ended 31Dec10) AR makes interesting reading.....
http://info.sgx.com/listprosp.nsf/07aed3...000169b68/$FILE/Challenger%20Annaul%20Report%202010%20(SAR1012-014).pdf

As shown in the 5-year Financial Highlights in p11, using FY10 as basis and looking backwards, Challenger's Group Revenue and PAT have doubled in the past approx. 3.5 years. This is a significant achievement! If the business can continue to grow at a similar but somewhat slower pace - bearing in mind the base is now larger - with some luck, we may witness Challenger posting a Group Revenue of approx. $500m and a PAT of $28m in FY2014, or perhaps in FY2015 if a hiccup happens along the way.

It is also important to note that, as described in the 1st para of the Chief Executive's Message (p7), the 27% yoy increase in the revenue of the core retail business in FY10 to $237.2m, is mainly attributed to better same-store sales, as the 3 new stores at Bedok Point, Plaza Singapura and nex at Serangoon were only opened in Q4-2010.

I am also happy to note in p29 that all the 6 directors are now shareholders, with (as shown in p89) CEO Loo and his wife Ong Sock Hwee now holding a combined stake of 53.28% (including deemed interests), and his long-term partner Ng Leong Hai holding another 24.35%. Even CFO Tan Wee Ko has emerged as the 10th largest shareholder with a stake of 0.52% (see p88).

[redcorolla95]

The FY10 (ended 31Dec10) AR makes interesting reading.....
http://info.sgx.com/listprosp.nsf/07aed3...000169b68/$FILE/Challenger%20Annaul%20Report%202010%20(SAR1012-014).pdf

As shown in the 5-year Financial Highlights in p11, using FY10 as basis and looking backwards, Challenger's Group Revenue and PAT have doubled in the past approx. 3.5 years. This is a significant achievement! If the business can continue to grow at a similar but somewhat slower pace - bearing in mind the base is now larger - with some luck, we may witness Challenger posting a Group Revenue of approx. $500m and a PAT of $28m in FY2014, or perhaps in FY2015 if a hiccup happens along the way.

It is also important to note that, as described in the 1st para of the Chief Executive's Message (p7), the 27% yoy increase in the revenue of the core retail business in FY10 to $237.2m, is mainly attributed to better same-store sales, as the 3 new stores at Bedok Point, Plaza Singapura and nex at Serangoon were only opened in Q4-2010.

I am also happy to note in p29 that all the 6 directors are now shareholders, with (as shown in p89) CEO Loo and his wife Ong Sock Hwee now holding a combined stake of 53.28% (including deemed interests), and his long-term partner Ng Leong Hai holding another 24.35%. Even CFO Tan Wee Ko has emerged as the 10th largest shareholder with a stake of 0.52% (see p88).

Yes the discussion is a bit more info than the statements from the close of the FY. Good to know that going forward, they're not just going in Malacca (which has a population of 430,000 just 2x Tampines), but also doing another store in KL - since the KL metropolitan area has 7million people with higher spending power.

However, saying that most of it came from same store sales is not actually the same as providing the data. So disclosures are getting better but far from good.

Guess this means they should shut down the business?

I am for keeping the business.

1. Challenger made $13.8m in FY10. The signage business on average is not losing the company money after paying for Chia's salary.

2. Chia has been with the group since the early years of Challenger. Loo probably hadn't dreamed of the scale that he achieves today when Chia and others were working hard for him. Those who have sticked together are indeed a core team. The group could have gone anywhere. Given another roll of the dice, the signage business might have been the one prospering.The human factor is not easily quantifiable and if it costs nothing for the shareholders to create a warm employment environment, I think it is worth it. Furthermore, you don't want a friend to turn into a foe.

3. The segment does not need heavy capex or other overheads.

Actually, after paying his salary, the signage business loses money, and doesn't seem to have prospects for improvement. Experienced person can always be put to other kinds of work like business development, sales / marketing, mentoring/training the staff etc.

[Drizzt]

hi dydx, i was wondering what is your take on pertama >> http://www.investmentmoats.com/money-man...ielding-5/

how does it compare to challenger

[dydx]

Between the 2, Challenger is quite obviously a better positioned business for growth and also more profitable in operating profit margin. In Challenger, we also have a superb and proven CEO, who is driven to achieve even greater business success for himself and his family, because he is also the founder and the largest shareholder of the business.