CDW Holding Limited

I mentioned that CDW is a high yield small-cap stock on 10 November 2014.  Below is a brief summary of its 3Q14 results.

CDW released 3Q14 result on 14 November 2014. Revenue declined by 29.3%, gross profit reduced by 24.6%, profit before tax dropped by 43.7% while profit after tax dropped by 42.6%. The respective dropped for 9 month YTD are 15.9%, 18.0%, 37.3% and 38.0% respectively. It is not a pretty sight.

Cash and bank balances is US$59.1m and debt is US$12.0m. Profit after income tax for Q314 is US$2.0m and for 9 month YTD is US$5.2m. Net cash generated in 3Q14 is -US$54,000 while that for 9 month YTD is US$7.0m. Minimum capital expenditure was incurred for 9 month YTD. EPS for 3Q is 0.42 US cents while for 9 month YTD is 1.09 US cents. Assume EPS of 0.42 US cents for 4Q14, full year EPS would be 1.51 US cents, which translates to a PER of 7.8 based on the last closing price of 14.8 US cents and exchange rate of US$1 to S$1.25. NAV is 14.2 US cents; hence, Price/NAV is 0.83.

Revenue for LCD backlight unit dropped because orders from customer dropped as a result of the termination of some old products in gameset and a shortage of a key part for ultra-thin backlight unit due to production difficulty. In order to ensure a stable supply of this key part, the Group intends to invest in a supplier by means of equity investment to expand the supplier’s production capacity which is solely for the Group’s production need. Sales in the Office Automation segment were affected by weak demand in Japan and the PRC. There was a drop in revenue of LCD Parts and Accessories segment.

Management guided that in the first half of the current financial year (“FY2014”), the Group experienced a general slowdown in customer orders. Even though Management has secured orders of new models of ultra-thin backlight units from customers in the second half of FY2014, the production has been seriously affected by the shortage of a key part due to production difficulty.

The LCD Backlight Units segment suffers from slowdown in sales orders of phased-out old models. It is the market trend that LCD backlight units for smart phones and tablets will dominate this segment. Such bigger size of LCD backlight units, albeit with higher average selling price, would lead to a lower profit margin compared to small size LCD backlight units as bigger size LCD backlight units require a higher proportion of materials. This trend is expected to persist in the foreseeable future. Volume orders of new models have been secured for the second half of FY2014, and Management continues to explore new customers in the PRC. For ultra-thin backlight units, the shortage of a key part due to production difficulty has affected the production and reduced the sales to the Group’s key customer. In order to secure a stable supply of this key part, Management is negotiating an equity investment in a supplier to expand its production capacity with output solely for the Group’s use. This investment will be approximately US$2.5 million, and the supply of the key part will pick up as soon as the facilities are installed.

Contending against the weak and sluggish demand in the LCD Parts and Accessories, Management has secured orders of parts for tablets and super-thin, lightweight notebooks which maintain the segment’s profitability.

Total number of issued shares, excluding treasury shares is 474,914,221. To maintain dividend payout of 1.5183 Singapore cents (yield of 10.3%), S$S7.2m is required. Note that my estimated EPS for the full year is 1.51 US cents or 1.89 Singapore cents and net cash generated from operating activities for the first 9 moths is already US$7.0m or S$8.75m. Hence, the net profit and cash flow would be enough to maintain the same level of dividend.  In addition, CDW has US$59.1m (S$73.9m) of cash on hand, it could afford to pay out all the profit and cash flow. 

Cash flow of CDW appears to be strong from the data I obtained from shareinvetsor.com but I need to compile the data on my own when I have time.

Despites of its recent lackluster performance, it appears to have strong ability to generate free cash flow to maintain a high dividend payout.

I have parked some fund in CDW to earn a high yield of about 10% while I continue my search for the next gem.