We are initiating coverage on Global Testing Corp (GTC), a semiconductor testing services provider, with a BUY rating as we think its investment merits trumps the weaknesses we are seeing in the semiconductor sector.
We expect the company to declare dividends when it reports its full year results. We are projecting yields of about 9% in FY15 and 14%-16% beyond that.
Such high yields are possible because of,
(1) GTC’s strong and sustainable cash flows,
(2) low likelihood of high capex spending in the near term, and
(3) high payout ratio mooted by the management.
Paying out all its cash during its capital reduction exercise indicates that the company is willing to return large sums of cash to shareholders. Our assumed payout ratio of 60% implies dividends of S$0.076 cents per share this year, which amounts to only 18% of our FCF projection for FY15.
Unprofitable myth - BUSTED!
Swings between losses and breakeven before FY14 masked GTC’s profitability, due to high depreciation expenses (non-cash), but cash has actually been piling up. GTC’s profits are likely to surge going forward as depreciation continues to trend down. Despite projecting revenue to fall by 13% (weak semicon outlook) in FY15F to US$33m, we expect EPS (in SGD terms) to be 18% higher yoy at S$0.13 per share, on lower depreciation, 5% net profit growth and the surge in USDSGD FX rate.
More capital reductions?
GTC’s Chairman and major shareholder, Mr. Chen Tie-min, is also the largest shareholder of Yageo Corp (2327 TT). Yageo has done 3 capital reduction exercises in the last 3 years while paying out dividends in the last 2 years, with a payout ratio of 70% in FY14. The stock price returned 35% over 3 years, but total return was 205% when dividends and capital reductions are factored in. Like Yageo, we think GTC might also be on the cusp of a run of capital reductions in the next few years.
Too cheaply valued
We refrain from using earnings-based valuation multiples to value GTC since its earnings look somewhat distorted. Sales, EBITDA or cash flow-based multiples would be more appropriate, in our view. GTC is currently only trading at 0.4x P/B, 2.3x EV/EBITDA, 1.5x P/CF and 2.3x P/FCF, on a forward basis, and way lower peer average. Our target price of S$2.00 is based on 3.4x FY16F P/CF, in-line with its peer average. (Read Report)
Source : KGI Fraser Research