File photo by Sim Kih
SCIENTIFIC INSTRUMENT makers are known for their resilience to business downcycles, so why did Techcomp record a sharp year-on-year earnings fall in FY08?
The leading Chinese manufacturer and distributor for analytical and life science instruments grew its FY08 revenues 23% y-o-y, reaching a record US$81 million.
"The slowdown in private sector capital expenditure was more than offset by increased government spending,” said CEO Richard Lo.
However, earnings attributable to shareholders were down 49% at US$3 million because of a forex loss.
Despite the surprise earnings drop, the good news for shareholders is that dividends will be maintained at 1.2 Singapore cents per share. The payout ratio is effectively doubled to 40%.
Mr Lo is also confident that 1H09 earnings will be strong.
Top line growth unaffected by recession
Turnover increased across all its geographic markets - which is predominantly China. Others are Hong Kong, India, Indonesia and other Southeast Asia countries.
Mr Lo told investors at a recent meeting that there is ample room for continued revenue growth from the less developed Southeast Asia nations like Indonesia (which grew 24% in FY08).
Two reasons were cited. Firstly, other than Techcomp, major analytical instrument players have yet to enter these markets.
Secondly, market penetration there is relatively small. For example, even though Indonesia is the world’s fourth most populous nation, it contributes only 2% of Group revenues currently.
Distribution of third-party instrumentation remained the Group’s major revenue contributor at 83% while manufacturing contributed 17%.
Caught by sharp Yen appreciation
The Japanese yen’s sharp appreciation against the US dollar had caught Techcomp off-guard in 2H08, said the CEO.
Forex hedging instruments are now used to prevent a recurrence of such losses, said the management.
Techcomp’s main principal is Hitachi, the global leader in scientific and analytical instruments based in Japan. That is why a large part of Techcomp’s accounts payables are in Japanese Yen.
On the other hand, about three quarters of its trade receivables are in USD.
The Yen was highly volatile in 2008. During 4Q08, the Yen appreciated sharply against the USD, rising from about ¥105 in early of Oct 2008 to about ¥90 at the end of last year.
This hit Techcomp’s distribution business in two ways, said Mr Lo.
Firstly, margins were squeezed during 2H09 when the Yen appreciated some 20%. Gross profit margins for FY08 declined 3.8 percentage points yoy to 29.8%.
Secondly, forex loses were booked when its Yen-denominated accounts payables appreciated in value.
Net FY08 forex losses were quite steep as a result – some US$1.6 million, compared to US$199,000 in FY07.
To lessen its forex exposure, the company wants to obtain manufacturing sources for scientific instruments outside Japan.
Currently, close to 70% of its third-party instruments are sourced from Japan, about 20% from the US while about 10% are from Europe.
File photo by Sim Kih
Companies with high gearing may run the risk of banks pulling their credit lines, as in Jurong Tech’s recent saga, but Mr Lo assured investors that Techcomp enjoys strong relationships with their bankers as the company’s cash reserves are a robust US$17.2 million.
This does not mean that the dividend payout policy will become more generous, said Techcomp’s financial controller Gilbert Sin.
The company wants to conserve cash for M&A opportunities. The criteria for its acquisition targets?
Firstly, the target company should be able to complement Techcomp’s core products and services.
Secondly, it should be financially self-sustainable and profitable.
And thirdly, the target company should be affordable enough for a meaningful stake to be acquired without compromising Techcomp's balance sheet.
Mr Lo has no intention of using equity financing given current depressed valuations for Techcomp shares.
Techcomp closed at 25 cents last Friday, giving it a forward PE of 3X based on Bloomberg’s broker consensus estimates.
