Finance Bloggers no doubt will have no dog sleep these past week with the slew of results released. Hopefully this weekend, I can clear my backlog of all my vested holdings. The first one this weekend is Telechoice International.
TeleChoice International Limited (TeleChoice) is a provider of telecommunications services and solutions.
It operates through three segments.
- The distribution services segment operates as a wholesaler, supplier, importer, exporter, distributor, agent and dealer of mobile phones, radio and telecommunication equipment and accessories, and related services.
- The telecommunications services segment provides radio paging services, international direct dial services, public mobile data and location tracking services, and distribution of private automatic branch exchange (PABX) systems. This segment provides value-added voice and data services, such as SunPage iDD and PushMail, location tracking and mobile data network services.
- The network engineering services segment is involved in the provision of mobile network infrastructure engineering services.
On March 1, 2006, TeleChoice acquired an additional 30% equity interest in Planet Telecom (S) Pte Ltd, thereby increasing its interest to 85%.
Things are not looking too well for Telechoice. Turnover/Revenue have been taking hits and so have overall profits.
- Revenue declined by 8.6%
- Profits for the year declined by 16.1%
- Cost of sales is more or less inline with revenue changes
- Net Profit margins, although usually small, are shrinking further from 3.67% to 3.37%
- Operating cashflow after tax is positive. However after taking into consideration capital spending of an acquisition of a subsidiary. It is negative.
One thing that i find a real pain to the eye is this: Their Net operating cashflow before tax is 7mil. The tax is 5.3 mil. So after tax the cashflow is 2.1 mil.
So their tax expense is nearly 75% of their cashflow. WTF!
Operations and Market Conditions
From the report, the group expects its investment in TeleFortune (China) to begin contributing to the Group from the second quarter of FY 2008.
I find no other portion of this section to be good information except this phrase: cautiously positive of the outlook.
To me, the main bulk of the revenue and profits will come from its distribution business. We can only hope that a 9 mil investment in the subsidiary will bring in much more revenues needed, though i don’t hope for much.
Telechoice, with a net profit margin of around 3.5%, have alot of operation concerns going forward. Costs accross the board will be increasing. Perhaps i still see a ray of light since handsets and assessories’ prices can be adjusted quite readily. However, if the pace of inflation cost growth is increasing, people might choose cheaper handsets or not buy at all! Handphones are an important part of our lives but the line contract is more important compare to the phone itself.
Telechoice will find it hard to count on its brand to sustain pricing powers. They will have to very much depend on the brand power of the handset makers to sustain their sales.
Brand is important because it in certain situations will transcend an inflationary environment. But telehoice case, their brand does not command any premium. More likely they will face pressures from suppliers.
Alot was mentioned in the report about finding new opportunities. Being familiar with how their management works, I would say that most opportunities is more as a hit and miss. Meaning out of 5 you would probably get 1 or 2 good prospects, but the other 3 tends to dissappoint.
Balance Sheet Strength
It is the balance sheet that you will see where most of their cashflow difficulty lies.
Telechoice used to have one really bad fall out that was due to cashflow and profit problems. Basically they bought more inventories to take advantage of pricing favorable to them.
I’m starting to not buy that argument any more.
If you have read the section on profit results above, you would have known that revenue or sales have not been increasing. If it were increasing, there is justification for an increase in inventory from 17 mil to 33.7 mil and an increase in receivables from 48 mil to 71 mil.
This is where their cashflow was impacted. This and that bloody tax expense. So what could have cause this?
I’m not sure, but probably that they have difficulty clearing old stocks. As for the inventory, i do not know which expensing methodology, but if its a first-in-first-out or FIFO, their current inventories will be of a higher value then those that is sold, so that could attribute to this.
Is this a necessity in their operation context? I suppose so, but i feel its not justifiable to have such a huge stock which if you fail to clear, you would have cleared it below cost price. We would have to read the actually annual report to know more.
- No long term interest bearing debts
- Cash levels are falling, reflecting difficult working capital conditions. From 25% of mkt cap to 22% of market cap.
The main attractiveness of Telechoice as a stock or company investment is needless to say dividend yield. Its past dividend yield have been very very attractive at 7-8% in a low inflation environment.
So what do we need to look at here?
Earnings Growth or Strong operating cashflow after taking into consideration expenditure requirements. In this aspect, Telechoice have not been growing its cashflow well. Its a case of more capital expenditure, not to replace depreciation but as new opportunities. They have their cashflow stagnating. We like a high dividend yield, however, if the management cannot grow their cashflow, the payout will stay as 7% or decline further.
What we want is dividend to grow base on our purchase price. e.g. 20% growth to a 8.4% dividend in 2 years time.
Strong cashflow is also another indicator of whether the payout is sustainable. Right now, Telechoice’s operating cashflow yield is only 1.92%! That means it is really paying out money from its balance sheet’s cash liao. Of course we hope that management return excess cash to investors but annual div payouts is best done based on the liquidity of the company through its cash flow. A 1.92% cashflow yield would mean it needs to cough out 5% from its cash holding. We have already mentioned above how important cash is to Telechoice’s working environment. So this is really bad.
Consistent dividend payout or presence of a fixed dividend mandate. Although dividend policy changes, if you are looking for consistent yield, especially if your portfolio is geared in retirement, this is a criterion. Look for those that did well or payout during the bad times.
Brandon mentioned to me that they missed one payment that they were suppose to give out in September. I believe this tax exempted payout of 2.5 cts makes up for it. So it is fairly consistent.
Increasing Dividend Payout. This is more related to the first criterion. Telechoice payout hasn’t grown much which is more due to not consistently grow their operations.In fact it have fallen since its good years 2 years ago.Definately not a good sign.
Low payout ratio vs Operating Cashflow and Profits. Low payout yet high yield is the best scenario. It means a few things:
- Low payout enables a high ROIC company to reinvest its cashflow to sustain and improve business. A payout that is near 90% or more would more likely require to get funding for expansion through other means like placement and debt financing.
- You got in at a good price thus you get to enjoy high div yield as well as growth. A good example is Courage Marine and Hong Wei. Both their payouts are around 23-27% of their earnings. They have high ROIC so it means the 70% of the cashflow can be reinvested at a high rate.
In Telechoice’s case the payout is last year they paid out 5 mil in div based on 1.25cts. Thats 250% current operating cashflow! However its only 37% of net profit. Such big difference. You would ask me so is it good or bad?
I think its more bad then good. The problem with using net profit, is that some companies can payout more than their net profit as they have high depreciation which is essentially accounting expense but meaning the firm still has it as hard cash. Taking away the capital replacement spending and you have a good idea of whether they are capable in paying out.
A good reason why the big difference in payout ratio is due to the huge receivables and inventory buildup that is not taken into consideration for net profit but is for cashflow.
Hence, Telechoice would really have to scale down payouts or they would have to grow cashflow in the future drastically to meet it.
Even if it does, the most it can hit i believe is 7-8% which is really pushing it.
Good Return on Investment Capital and Return on Assets. For earnings you can either pay back to us, or as management you can reinvest to grow more earnings. If it is the latter, we would want to see the results of it and these are the 2 things that we look at.
Taking out the excess cash on balance sheet, the returns on invested capital have declined from 12% to 5%. This does not bode well as investors. going forward we need to see if this trend will persist. If it does we might as well collect this dividend and reinvest in other companies or investments.
Attractively priced. A dividend yield company should be able to consistently value based on its cashflow. And in telechoice case at WACC of 10% and a conservative 3% growth, current share price represents only 24% of the enterprise value.
At PTB of 2 times, I don’t think it looks dirt cheap.
To summarise, don’t just look at the yield and be attracted, if you wanna stick around with this one, it has alot of challenges going forward. It is whether it can navigate well in this treacherous conditions.
My yield is nearly 9.4% but i see almost 6-7% of that coming out from my pocket indirectly. Lets see what is the price movement like.
Saturday 15th of March 2008
Cashflow for these counters i feel, is determined by management and economic outlook.
It is very very easy for the cashflow to be hit when they hold too much inventory! Telechoice have this problem always. This also reduces the ability to pay dividends.
I'm sure you have better counters then telechoice for this. Do share with us if you can.
Friday 14th of March 2008
I don't expect 2.5c dividend for every year, it's simply unrealistic to get such high yield without taking risk. While I did not see any major issue in their cash flow. One good side of retail business is that generally their cash flow is strong. Look at local retail counter such as challenger, robinson and so on. Still optimistic on this counter unless the management is hiding something. Offloaded my $ on this counter due to market uncertainty, waiting for citibank to reach $15...
Sunday 9th of March 2008
it is a competitive business and one that telechoice currently have some barriers due to their association to ST telemedia.
the problem is that if u are aiming it as a div counter, its stats don't look real good for a sustainable div.
other than that it would really depend on the management, how they grow that distrubtion business.
Thursday 6th of March 2008
Good point... I have been holding this for sometime and would post the question of the increasing inventory to their management Q&A. While I do think handset distribution is sustainable business, handphone usage is more fashionable and complicated these days, and become an important part of modern life. Do agree that it is a very competitive business with low margin, while there is still a successor in every business line.