• Kudos to a bunch of shareholders of Powermatic Data for their in-depth and multiple questions for management ahead of the company's AGM on 26 July. Seldom do we see such engagment by investors of small-caps listed on the Singapore Exchange. 

• Kudos also to Powermatic management for its substantive replies in a 9-page release on the SGX website. See excerpts below which relate to Powermatic's property, profit and peers
.

• For a few years now, Powermatic seems to have a bunch of believers and value investors who consider that the company is a gem. An under-appreciated one. Here's why:

» It was debt-free and had S$55 million cash as at end-March 2023 (ie, 55% of current market cap of S$101 million).  

»  Knight Frank's report dated 31 March 2023 valued Powermatic's investment property in Harrison Road at $46.3 million

» Thus, cold cash and tangible real estate add up to the market cap of Powermatic. No value seems to be attributed to the consistently profitable operating business (which generated S$9.5 million net profit in FY2023).

A few years back, things were more ridiculous when the sum of the assets exceeded the market cap.

The gap has closed with the stock up ~100% from 5 years ago. Yet today, arguably, there's still significant upside potential.


Powermatic duo9.22NextInsight file photo

Q: The company has plans to redevelop the investment property. Why don’t the company sell the property outright to realise the value immediately and distribute the proceeds to all shareholders? Is the company restricted by the terms of planning approval given by URA? 


A: The property was acquired for long term investment purpose. Over the years, its value has arisen along with Singapore’s general economy. The management has, on many occasions, been asked by shareholders to dispose of the property for profit.

DIY IS BETTER
"A straight sale of the property has been considered and discussed with potential buyers. However, from our analysis, the potential of maximizing the returns from the investment is substantially higher if we were to undertake the development ourselves."
-- Powermatic Data

However, in the management’s opinion, the true value of the property investment has not yet been realized and will continue to appreciate. In the proposal to redevelop the building, we see an opportunity in land scarce Singapore, to provide specially designed facilities for the food industry and in doing so we can realize a gain equivalent to many years of appreciation.

A straight sale of the property has been considered and discussed with potential buyers.

However, from our analysis, the potential of maximizing the returns from the investment is substantially higher if we were to undertake the development ourselves.

Powermatic building7.23Powermatic's investment property (7&9 Harrison Road) comprises 2 adjoining six-storey semi-detached industrial buildings.
Knight Frank's valuation: S$46.3 million.


Q: Is there expertise in the board to execute the redevelopment? Why divert attention, time and resources to take the risk of redeveloping the property? Are you able to ensure the designs/ plans are going to suit the needs of potential buyers in the F&B industry 2-3 years down the road?

 

A: Our plan is to engage the best professionals to do the job.

Q: What is the reason for selling units in piecemeal fashion instead of the entire building? Is this going to be a prolonged ongoing distraction again from the core Wifi business? Are there plans to rent out some units and/or go into the property management business if the company is unable to sell the units?

 
A: As to the plans of selling all units or retaining the unsold units for rental, the Company, apart from its core wireless connectivity business, is also in property management business, profitably managing units not used by the company for rental returns as well as up keeping the property to a high image.

It is not a significant part of the company’s business but nevertheless an efficient capability that the company can use if there are units that the company will retain for leasing. However, the main objective of the redevelopment is to sell all the developed units.

The land area and plot ratio of the property will remain unchanged from the present plot.

However, the GFA will benefit from certain design characteristics of a food production building. It will be larger than the existing GFA.

The exact figures are yet to be determined as the design is not finalized, however we hope to achieve a net usable area of near 70,000 square feet. The investment property is seated on freehold land.

Q: The group has the highest net profit margin in 2022/2023 among manufacturers of wireless modules: AMPAK Technology Inc (14%); Quectel Wireless Solutions Co Ltd (4%); Azurewave Technologies Inc (3%); Advantech Co Ltd (16%);Powermatic Data Systems (31%).  Please help us understand how the group managed to achieve significantly higher net profit margins compared to peers in the same industry.

 

A: The capital and cost structure for each of these companies are likely to vary.

Other major determinant of profit margins are target markets (volume or specialists), performance, features, reliability level and engineering contents of the products. Therefore, without reliable information, we are unable to perform any meaningful comparison.

 Q: According to 2023 annual report, two customers accounted for 33% and 12% of 2023 total revenue. Are these new customers? Or are they repeat customers from 2022? In 2022, there is one customer which accounted for 31% of 2022 revenue. Will these two customers continue their purchases beyond FY2023? 

It is noted that 2 customers accounted for 33% ($10m) and 12% ($3.6m) (Pg 94 of 2023 AR). How does the company manage this customer concentration risk?

 

A: The two major customers accounted for 33% and 12% of the FY2023’s revenue are existing customers. Every business relationship is valuable and it is our interest that they be preserved and further advanced where possible. To avert concentration risk, the Group has increased its customers’ base.

RENOWNED CUSTOMERS
"Our customers are mostly renowned corporations or distributors. The “project-based” refer to the customers’ projects. Our business with these “project-based” customers is recurring in that the customers will work closely with us to evaluate our products when they embark on new projects.
-- Powermatic Data

We are a niche player in the vast space of wireless products, we provide a unique product and service. We have imitators but not real competitors. Our customers are mostly renowned corporation or distributors. The “project-based” refer to the customers’ projects. Our business with these “project-based” customers is recurring in that the customers will work closely with us to evaluate our products when they embark on new projects.

The Group has its own production facilities, hardware and software R&D teams to continually improve and innovate its proprietary products.

Apart from offering off the shelf proprietary products, it also provides leading Original Design Manufacturing for a wide range of wireless networking products to cater to the customers’ needs.

The wireless businesses have always been competitive with players vying to increase their market share through innovative products – including ourselves. Like any other competitive markets, there are attrition and new entrants.


Full Q&A here.

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