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Does This Small-Cap Company With a Dividend Yield of More Than 7% Make a Good Investment?

Jeremy Chia

Recently, I performed a screening for companies that had low debt, high return on equity and earnings growth over the last three years.

In my search, I found that one of the companies that fit the criteria was Ban Leong Technologies Ltd (SGX: B26). In its last financial year, Ban Leong achieved a return on equity of 20.4% and had a debt-to-equity ratio of just 12.8%. In the last three years, its revenue and earnings grew by 14.4% and 166% respectively. Despite the strong financials, only a few analysts were covering the company.

In light of the impressive numbers, I thought it would be useful to take a closer look at Ban Leong’s business to assess if this little-known company is worth investors’ time.

What does it do?

Ban Leong was founded in 1993 and listed in 2007. It is a distributor of technology products in Singapore, Malaysia, Thailand and Vietnam, and its product range includes audio and visual products, and eGear, which is an equipment used for gaming. It works with leading brands in the technology sector, including Samsung, Nokia, Belkin and Alienware.

Operating track record

To see if the company has a track record of consistent revenue and profits, we can take a look at its financial data over the past five years. The table below shows the revenue, operating income and net income between 2014 and 2018:

Source: Author’s compilation of data from Morningstar

As you can see, Ban Leong has managed consistent revenue growth over the last five years. There was a slight blip in 2017 as consumer spending in its core markets were lower than expected and its Australian operations were suffering losses. However, it has now closed its Australian operations and streamlined its business. This was one of the reasons for the strong rebound in operating income in 2018.

Financial position

Ban Leong has a healthy financial position with just S$2 million in convertible loan, which it took in 2017 as a potential partnership and collaboration in China. Other than that, it has no outstanding borrowings and has S$15 million in cash. It has managed to grow its book value by 26% over the last five years while continuing to pay a consistent dividend (13 consecutive years of paying dividends).

In the recent fiscal year, the group increased its dividend paid out to shareholders. Ban Leong also has a consistent cash flow that can sustain its dividends. It generated S$5 million in free cash flow in the latest fiscal year and paid out S$2 million in dividends.

Looking ahead

Ban Leong’s management has been proactive in seeking out new products and brands to add to its existing offering. It is also trying to grow its geographical footprint, while at the same time, knows when to call it quits. I feel that its decision to leave the challenging Australian market where it was making operational losses was a tough but an ultimately good decision that has improved the company’s bottom line.

Ban Leong’s management has also said that its online sales platform has seen growth in recent years. Though still a small percentage of overall sales, they are expecting that the younger population will increasingly use this platform for purchases.

Nothing is for certain, but Ban Leong’s management has seen the company through multiple economic cycles, and the company has refreshed its product offering each year to keep them relevant. It looks likely to continue to do so in the future.

Founder and chairman, Ronald Teng, also has a 22% stake in the company and will likely have shareholders’ interest at heart.

Current share price valuation

Ban Leong shares trade at S$0.23 apiece, with a market capitalisation of S$26.3 million. The price translates to a price-to-book ratio of 0.91, a price-to-earnings ratio of 4.7 and a trailing dividend yield of 7.6%.

At that price, Ban Leong looks to have a low valuation when compared to the Straits Times Index (SGX: ^STI). The company has a lower price-to-earnings and price-to-book ratio, and also has a much higher dividend yield than the index. There are certainly risks when investing in a small cap company such as Ban Leong, but at this price and with management’s past track record, it could be an interesting prospect worth looking deeper into.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Jeremy Chia doesn't owns shares in any companies mentioned.