(Sept 25): Shares in Multi-Chem, which specialises in providing services to printed circuit board (PCB) manufacturers, are up more than 30% since the start of the year. Over the last 12 months, they have nearly doubled. Even so, they could still present a buying opportunity for an investor keen on yield. At current levels, the stock is trading at less than seven times earnings and has a gross dividend yield of about 5%.
Multi-Chem, which has a market capitalisation of $80 million, was established in 1985 as a distributor of PCB chemicals and materials. The company is majority-controlled by Foo Suan Sai, its CEO and one of the founders. Foo has a direct interest in the company of 40.58%. He also has a 28.1% deemed interest in shares held by his wife, which brings his total stake in the company to 68.7%.
In 2002, Multi-Chem expanded its PCB manufacturing services into China. It also diversified into the distribution of IT services, which includes internet security, network management and video conference products. These include information and network security products and services from companies such as CyberArk, Check Point Software Technologies and Blue Coat Systems, which is owned by Symantec. Multi-Chem also provides certified IT training courses for some of these software systems.
The IT business has grown to cover Asia-Pacific and Europe, and is today the company’s main revenue generator at more than 90% of total turnover. Multi-Chem has been gradually scaling back its PCB operations as it faces lower customer orders. As management explains in its financial statements filed with the stock exchange, the PCB business’ gross profit margins have been declining because of lower production volumes well as fixed depreciation costs for its drilling machines.
Nevertheless, the company’s earnings before interest, taxes, depreciation and amortisation have grown over the last three years at a compound annual rate of nearly 15%, from $12 million in FY2014 to $18.2 million in FY2016.
For FY2016 ended December, Multi-Chem posted turnover of $361.5 million, up 4% y-o-y. The IT business grew 4% y-o-y to contribute $334.8 million. Total earnings more than doubled to $9.7 million. This included other income of more than $3 million, compared with $1.9 million recorded in FY2015. The other income components included a lower allowance for inventory obsolescence than the year before; and a significant reversal of allowances made for doubtful third-party receivables. There was also about half a million dollars in foreign exchange gains, versus foreign exchange losses of $252,000 the year before.
Earlier this year, Multi-Chem sold off the bulk of its mechanical drilling equipment to one of its customers, netting a gain of $2.8 million. The company explained that the equipment had been underutilised.
In 1HFY2017 ended June 30, the company posted earnings of $5.4 million, up 62% y-o-y. This included other income of $3.8 million in the second quarter, owing mainly to the gain on disposal of equipment. Turnover for the period was up 18% y-o-y at $203.4 million. The bulk of this improvement came from the IT business, which recorded a 22% increase in sales to $195 million. This represented 96% of total turnover. Multi-Chem says the company had secured “certain big deals” during the period.
Multi-Chem acknowledges that its IT business is not immune to developments in the broader political and economic environment. “However, IT is still a critical requirement in businesses, and security will continue to remain an integral part of the IT infrastructure,” it says. According to US-based IT research and advisory firm Gartner, worldwide spending on information security is expected to reach US$90 billion ($121 billion) this year, up 7.6% y-o-y. It is expected to top US$113 billion by 2020.
Multi-Chem has been generating free cash flow, which amounted to $27.5 million at the end of the last financial year. As at June 30, it had cash and cash equivalents of $50.6 million, up from $44.6 million in the same period last year.
For FY2016, Multi-Chem paid a total dividend of 4.41 cents a share, up 33% y-o-y. It is paying 1.11 cents a share for the six-month period ended June 30. The stock trades ex-dividend on Oct 2.
