Hard disk parts maker Broadway appears cheap, but faces risks from legal dispute

SHARES of mainboard-listed Broadway Industrial Group have gained in recent months in spite of a scuppered deal, possibly thanks to decent growth. But investors should be aware that the company's cash pile is at risk of being diminished by a legal dispute.

Broadway, which makes actuator arms for the hard disk drive (HDD) industry, posted a 17.7 per cent growth in revenue to S$471.4 million for the year ended Dec 31, 2021, from S$400.7 million a year earlier. Net profit in the same period grew 8.2 per cent to S$15.3 million, from S$14.1 million.

Net cash flows from operating activities declined to S$13 million in FY2021, from S$42.3 million a year ago, as trade and other receivables nearly trebled from S$8.6 million to S$24.3 million.

But the company also used up less of its cash on financing activities, keeping its pile of cash equivalents relatively steady at S$27.7 million versus S$29 million the year before.

For FY2021, the company will be distributing a total of 1.5 Singapore cents per share in dividends. This comprises an interim dividend of half a cent, paid in September last year; as well as a final dividend of half a cent and a special dividend of half a cent, both approved by shareholders at the recent annual general meeting.

The payout represents 45.9 per cent of Broadway's earnings for FY2021. Based on its close at S$0.19 on Friday (May 13), that gives the counter a historical annual dividend yield of 7.9 per cent.

The company has also recently formalised a dividend policy. It aims to pay out 30 per cent of its profits from FY2022, subject to "cash requirements for M&A activities and capital expenditure".

Broadway has a market capitalisation of S$89.7 million. It trades at 5.8 times' its FY21 earnings and roughly on par with its net asset value per share of 18.95 Singapore cents as at end-December.

Given its ability to generate cash and management's projection of a stable outlook, the company appears attractively priced.

Arbitration with buyer

There are, however, some risks to consider.

On Dec 31, 2020, Broadway had announced a sale and purchase agreement to sell its HDD business for S$50 million to 2 Chinese companies: Suzhou Gefan Hardware and Plastic Industrial Co and Seksun Technology (Suzhou) Co.

News of the potential sale had sent Broadway's shares soaring. Over the 12-month period from the announcement, the counter gained 31 per cent.

But the deal was terminated on Jul 1, 2021 as the long-stop date had lapsed while the deal underwent a review by the Singapore Exchange. Broadway said the parties involved could not agree on an extended long-stop date.

Gefan and Seksun have since initiated an arbitration with the China International Economic and Trade Arbitration Commission, claiming US$3.9 million in break fees, legal costs and other expenses incurred as part of the agreement.

They are also claiming damages of S$9 million, being the net profit of Broadway’s HDD business in the first half of 2021. They allege that the profits would have gone to them if the transaction had been completed in time.

Broadway's position is that the request for arbitration has no factual, contractual or legal basis, It has counterclaimed for the expenses incurred defending the arbitration and the arbitration costs itself.

Broadway was in a net cash position of S$16.4 million as at Dec 31, 2021, but an unfavourable arbitration ruling would put a serious dent in that cash pile.

The risk of that may already be reflected. Broadway’s shares are down 19.1 per cent from a high of S$0.235 on Nov 1.

Growth prospects

Broadway noted in its FY2021 financial statement that it is cautiously optimistic about the prospects of its HDD business, as demand for mass capacity hard drives for enterprise use and personal storage hard drives remains strong.

The company has machining and assembly operations in Ayutthaya, Thailand, where it derives 66.2 per cent of its revenue. It also has machining operations in Shenzhen, assembly operations in Wuxi and coil operations in Chongqing.

To diversify its business operations, the company acquired a 55 per cent stake in Beijing Ant Brothers Technology (BAB) in 2020. BAB develops cleaning robots for large glass facades on building exteriors and has a presence in Beijing, where it does research and development.

Broadway is working with an institute of higher learning to commercialise the facade cleaning robot in Singapore. It has also blended BAB's capabilities with its own to form an entity called BIGL Robotics, which produces disinfection and service robots with artificial intelligence capabilities.

The robotics division generated losses of S$4.5 million in 2021. But the company is optimistic about the prospects for this business as it offers "solutions to many of the concerns we have today, including reducing high-risk work and reliance on manual labour and lowering costs".