Datronix – Real Bargain Or Value Trap?
|March 17, 2016||Posted by Oddmund Grøtte under Stock Analysis|
Share price when article published: 1.27 HKD
This company looked interesting on one of my scans (on numbers from year-end 2014). The reason is the company had a market capitalisation less than its cash holdings minus liabilities. It’s not often you find that (cash was 464 million and total liabilities 64 million). Let’s look more deeply at this company:
Datronix Holdings are listed on Hong Kong Stock Exchange with ticker 889 (on Yahoo! it’s 0889.HK). Its market cap is just 406 million HKD, which equals 52 million USD.
Datronix manufactures magnetic components. This can be transformers, chokes, inductors etc. According to their latest annual report they have about 300 customers and 83% of revenue derived from USA. Most of the production is being tailored made by the customer, and most of the products is “high-end”. This should give them a little bit of a competitive edge.
The business seems to be getting worse and worse year after year (numbers from 2005 until 2015):
|Revenue HKD Mil||3.749513|
|Gross Margin %||-3.98293|
|Operating Income HKD Mil||-5.73751|
|Operating Margin %||-9.23631|
|Net Income HKD Mil||-5.95875|
|Earnings Per Share HKD||-6.21689|
|Book Value Per Share HKD||10.77366|
|Operating Cash Flow HKD Mil||-1.11848|
|Cap Spending HKD Mil||-6.6967|
|Free Cash Flow HKD Mil||-0.49886|
|Free Cash Flow Per Share HKD||-1.65666|
Revenue is up, but net income is gradually falling. Margins are falling almost every year.
In January 2016 the company issued a profit warning. Their cash is in USD and renminbi, but the depreciation of renminbi has caused a major unrealized loss for the company. In addition, their newly bought investment property has just after 6 months ownership a loss in fair value (more of this later). According to the profit warning this might result in a loss for 2015.
Balance sheet analysis:
The company has no interest bearing debt. At year-end 2014 cash was 464, current assets 576, total assets 787, current liabilities 18 and total liabilities 64. As you can see, a rock solid company. Return on invested capital has plummeted from 20% in 2005 to 5% in 2014. One of the reasons is of course all the cash the company keeps on its balance sheet that is yielding next to nothing.
Datronix has paid a dividend every year since 2001. They pay dividend twice per year, one interim usually in September and one final dividend in June. To my knowledge they have no formal dividend policy but it is at the board’s discretion depending on profits and future outlook. In 2015 they paid out 4.5 cents which equals 3.54% at todays price of 1.27 HKD.
Stock price today: 1.27 HKD
Because the company has such a clean balance sheet and no debt, lots of cash and now also a property to let out, you get the main business more or less for free if you “raided” the company. You can buy Datronix, pay back cash to yourself and divest the new property, and still have working capital to run the main business. However, that is unlikely to happen as it’s unlikely shareholders would approve.
Still, even though it is dirt cheap, I would not invest in this company. I fail to see any trigger for the share price to go up unless they suddenly become more shareholder friendly.
A positive note is that the chairman bought more stocks in the company in early 2015.
Even though they state they have 300 customers, the biggest customer contributes 21% of sales. Even worse, the 5 biggest customers are 65% of sales in 2014. But the biggest concern for me is if this company acts in the best interest of the shareholders. Specifically, in 2015 they purchased an investment property for 117 million HKD in a “prime location” in Hong Kong. This property is of no use for production, but simply bought as a financial investment. This purchase does not make sense to me. Why buy property instead of giving back money to shareholders?
In their latest interim report they cited pricing pressure and rising minimum wages as a concern.