Author: ss20_20 | Publish date: Sun, 12 Jul 2015, 04:19 PM
Flying higher: Since 2013, SAM Engineering had transited from being a semiconductor-dominant business to one that now derives close to 70 of its revenues from the aerospace industry. It produces components for plane manufacturers such as Boeing and Airbus.
Dividend play prompts investors to look at Sam Engineering & Equipment
THE growth in dividends being paid out by Sam Engineering & Equipment (M) Bhd (SAM Engineering), one of the few component manufacturers for the airline industry, has attracted increasing interest by investors locally and abroad.
According to data obtained from the Bloomberg terminal, SAM Engineering, which is controlled by Singapore Aerospace Engineering (SAM), had seen its dividends returned back to shareholders increasing at an exponential rate of 108% in the past one year.
Its recent dividend announcement took the market by surprise as the company has a portion of its business in the semi-conductor industry - manufacturing equipment for producers - a segment that is going through a tough operating environment.
However, this obviously has changed as the airline component of its business takes up the mantle to drive the earnings of the company.
Since 2013 SAM Engineering had transited from being a semiconductor dominant business to one that now derives close to 70% of its revenues from the aerospace industry.
It produces components for plane manufacturers such as Boeing and Airbus.
There are not many such producers in this region as it takes years of expeience and perfection before the parts can be acceptable to the plane manufacturers.
SAM Engineering’s move towards becoming a supplier of components for planes is outlined by its chairman Loh Chuk Yam.
“Despite the continued weakness in our equipment business, revenue for the group rose steadily due to the strong aerospace sales.
“The demand for aero-engine cases exceeded the negative impact caused by the weak test equipment business,” the company’s chairman Loh said in the annual report.
Thanks to its diversification into manufacturing parts for plane, SAM Engineering has been able to derive steady income and build up a strong balance sheet.
It has cash balances of RM103.6mil and no borrowings.
Its trade receivables after netting off payables about RM56mil. It also has inventory numbers of another RM140mil.
Two weeks ago, it announced special dividend and interim dividend amounting 32.2 sen, which is higher than the 17.25 sen declared last year.
Notably, SAM Engineering had seen dividends growing consistently in the past four years.
Its shares had registered growing dividend yields, as it rose from a net yield of 1.7% in 2012 to 7.67% this year. (see table attached)
With such generous payouts generated from its business, SAM Engineering had recorded a net dividend payout ratio of 40% in the financial year 2015 (FY15) ended March 31.
The latest dividend announcement in the past week will only be computed for FY16’s payout ratio.The payout ratio in FY15 almost doubles the previous year’s payout ratio of 21%.
Whether this short term buying interest or high dividend payouts can be sustained moving forward will be key but analysts note that the aerospace industry is a highly niched one.
It also has strong shareholders in SAM and other Temasek Holdings (Pte) Ltd related companies holding a total of 74.18% in the Penang based company.
“The reason being for some hesitation in its share price could be the illiquid nature of the stock, but it does seem like it is a fundamentally sound company with strong shareholders,” an analyst says.
SAM came into the company in 2010 when it was then known as LKT Industrial Bhd. SAM injected the aerospace business to complement LKT’s operations of manufacturing equipment for the electronic industry.
In return for SAM injecting the aerospace business, the company issued the Irredeemable Convertible Unsecured Loan Stocks (ICULS).
The key question today is whether such dividend payouts can sustain, and on the face of it notwithstanding any changes in future capital requirements, the company will be able to keep such payouts.
The total dividends paid in FY15 totalled RM14.54mil and for FY16, it will be paying at least RM27.14mil at the current weighted average number of shares in circulation.
Its free cash flow per share is equivalent to 92 sen.
Enticing ICULS holders?
The corporate exercise of distributing more dividends have also enticed the holders of Sam’s ICULS to convert their holdings of these loan stocks to shares.
According to filings with the stock exchange, close to 40% of the ICULS holders have now converted their loan stock holdings to ordinary shares on the basis of one RM1.00 nominal value of ICULS for approximately 0.476 ordinary shares each.
Following this, the latest issued and paid up share capital of Sam’s ICULS now stands at 50.88 million loan stocks away from the 101.25million ICULS issued when it was originally announced.
The increased conversion by holders of the company’s loan stocks indicates that increasing numbers of its loan stocks holders have become receptive and are indeed aware of the rising dividends of the mother company.
This after all is a win-win proposition for both the company and holders of Sam’s ICULS, if the scenario of increasing dividend payouts does sustain into the future.
This is premised upon the company being able to save on the indicative coupon rate of 4% and reduce on short and long term liabilities exposure while the additional shareholders will be able to gain a direct exposure to the company’s growth and whatever direct returns that these may entail in the future.
The ICULS corporate exercise was initiated then in Sept 2012 to fulfill the purchase consideration for the acquisition of a 100% stake in Avitron Private Limited from Singapore Aerospace Manufacturing Pte. Ltd.
According to its financial statements for the FY15; Sam Engineering had seen its total finance costs due to the ICULS also being reduced by 67.3% to RM666,000 from RM1.11mil in FY14.
Staronline | 04 Jul 2015
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