Global Testing Corporation Limited - Much stronger than expected

Better than expected results; cash flows remain strong
GTC reported 9M15 revenue of US$25.9m (-10.5% yoy; due to weakened demand in semiconductors, as pointed out previously) and net profit of US$3.3m (+66.9% yoy; on lower depreciation expense and higher FX gains). Revenue and net profit in the first 9 months beat our expectations and formed 78% and 104% of KGI's FY15F forecast, respectively. Cash flows for 9M15 continued to look strong, with the company, clocking US$12.5m in net cash flow from operations, and free cash flow of US$8.6m, thus increasing our conviction that GTC will be able to pay out dividends at the end of FY15F.

Cash back up to US$9.4m despite S$53m capital reduction
GTC should have wiped out its cash balance (of US$38.6m in 2Q15) due to the S$53m capital reduction disbursement to shareholders during 3Q15. However, strong cash flows, along with the addition of a small amount of debt, has brought GTC's cash balance back up to US$9.4m, as the company continues to rebuild its wealth. In addition to paying dividends, we believe it is likely that the company could do another round of capital reductions when it amasses another substantial amount of cash. We think investors could take cue from the multiple capital reductions seen in GTC's related company Yageo Corp (2327 TT) as an example of what could happen in the future.

Potential dividend payout still looks attractive
With the high likelihood that GTC would pay dividends when it reports its full year results, we previously made a forecast that the company would pay out 60% of net profit as dividends. This payout ratio should still imply an attractive dividend yield of ~6% for FY15F, and ~10%/12% for FY16F/17F, in spite of the yield compression due to its recent price increase. With the expectation of a sluggish global growth environment, we think investors should look to add high and sustainable yielding stocks such as GTC to their stocks portfolio.

Technical Analysis
Daily Chart
Reiterate our BUY rating and S$2.00 target (3.4x FY16F P/CF)
Despite its 38% increase in price since our initiation, GTC still trades at 2.1x FY16F P/CF, a big discount to its Taiwanese peers (3.3x). We reiterate our view that the fundamental factors mentioned above and its cheap valuation trumps the weak semiconductor industry outlook, and investors should do well with buying this stock on the cheap in this semiconductor down-cycle. (Read Report)

Source : KGI Fraser Research

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