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Dividend stock FPI (9172) is consumer product stock listed in Malaysia main market. FPI is a Taiwanese company, and they are manufacturer for audio system and musical instrument. With current share price of around RM3.1 and dividend of 20 cent distributed for FY2021, the dividend yield is around 6%.

(Last update: 20th Aug 2022 based on quarterly report issued on 18th Aug 2022. Updates are made in red.)

Background of FPI

Full name of FPI is Formosa Prosonic Industries. Biggest shareholder of FPI is Wistron, a listed company in Taiwan, with shareholding of 28% as of financial year end of 2020.

There are two main product categories manufactured by FPI, which are audio system and musical instrument components. For audio segment, products of FPI include conventional speaker, smart audio system and also wireless speakers.

Performance of FPI has been lackluster prior to 2017. Starting from 2017, sales of the company started to grow. From my observation, there were two reasons behind the growth.

First is improved sales from musical instrument segment. Growth from musical instrument component has been very strong since 2017. In annual report of FY2017, company mentioned that they have formed strategic alliances with branded musical instrument customers (e.g. Roland). In one year time, sales of musical instrument components outpaced the audio segment for the first time in FY2018.

Secondly, FPI has done some organization restructuring from 2015 to 2017 to streamline the operation. In 2015, FPI discontinued operation in China, 2016 disposed one associate in Malaysia and in 2017 discontinued operation in UK. FPI today only operates from Malaysia, with a R&D center in Taiwan.

Business model

FPI positions themselves as OEM (original equipment manufacturer) and ODM (original design manufacturer) , i.e. FPI does not own the brand names. Based on the latest annual report for financial year 2021, 93.3% of revenue was contributed by 3 customers, Therefore, the performance of FPI relies heavily on the business performance of these major customers.

There were only two major customers contributing signification portion of revenue back in financial year 2018. Starting from 2019, its bigger shareholder became one of the major customers. In AGM 2020, management mentioned in year 2018, FPI purchased EE parts materials from Wistron. From the beginning of year 2019, FPI started its assembly and new projects together with Wistron.

Financial

Net cash company

FPI is a net cash company with zero borrowing. Based on the latest financial quarterly report ending Jun 2022, FPI owns RM271million of cash, equivalent to approximately 106 sen of cash per share. The liabilities of FPI are only for payable, lease contract and tax, no borrowing at all. Therefore, there is no doubt that financial health of FPI is very strong.

Credit risk

As mentioned above, 93.3% of revenue was contributed by 3 customers for financial year 2021. As a result, there is a credit concentration risk here.

Currency risk

Impact of USD/MYR exchange rate on FPI could be significant. Based on annual report FY 2020, 61% of trade receivable were in USD. On the other hand, FPI also imported raw materials in USD, such as resin, wood and metal parts. Capital expenditure associated with purchases of plant and machinery is also denominated in USD.

As a result, sales and cost in USD can somehow offset each other, providing certain protection for FPI for currency risk. FPI also uses some financial tools to manage the residual currency risk.

Despite this, fluctuation of currency rate could still have a significant impact on FPI. This is one of the reasons causing growth rate of gross profit to be quite different from net profit.

Gross profit, net profit and EBITDA

Net profit of FPI can be quite different from gross profit, below are two main reasons.

1. Foreign exchange gain/loss as mentioned in currency risk section above
2. Depreciation. For instance in financial year 2020, FPI recorded gross profit of RM90.57 million and depreciation charge over the same period is RM12 million.

For me, I will look at gross profit first to see how FPI performs just from business operation, then look at EBITDA to evaluate company’s performance without asset depreciation. Finally only look at net profit to see how other factors affects the bottomline.

Financial highlights (Quarterly Report 2022 Q2)

• Demands for FPI products are generally seasonal. Historically Q3 is the the strongest quarter due to customers preparing for peak demand during the year end holiday period.

• In FY2021, FPI recorded earning per share (EPS) of 39 cent. In the fist half of FY2022, the two historically weaker quarters, FPI has already made EPS of 21 cent.

• Compared to first half of the previous year, revenue is better by 14%, gross margin increased by 13%, EBITDA increased by 21%, and profit after tax improved by 23%. The reason why net profit is much better than gross profit, is because of forex gain due to weak MYR vs USD. The forex gain recorded is RM16.8million, contributes to 25% of the profit before tax !

• I was actually a bit worried when gross margin in Q1 dipped to 12.6%. Coming to Q2, gross margin improved to 15%, bringing average gross margin in first half of 2022 to 13.8%. Although it is lowered than 14.7% in previous year, I think this is okay considering foreign labor shortage and minimum wage increase happened so far in 2022.
  • 2017: 13.04%
  • 2018: 11.53%
  • 2019: 9.72%
  • 2020: 11.82%
  • 2021: 14.73%
  • 2022 (up to Q2): 13.78%

• As mentioned above, from 2019 the biggest shareholder Wistron has become one of the major customers of FPI, Since then, I monitored contribution from Wistron closely. On average, Wistron contributed around RM20million of revenue since 2019 (about 20 to 25% of total revenue). Coming to 2022, contribution from Wistron dropped significantly. FPI relies heavily on the 3 major customers, so I would want to know if there is anything happened to business of the either customer. Whether contribution from Wistron will continue to drop, I would wait and observe result of Q3 before making any conclusion.
  • 2019: 24.7%
  • 2020: 27.7%
  • 2021: 21.1%
  • 2022 (up to Q2): 12.69%

• Based on my research on the online news, smart speaker company Sonos changed their supply chain strategy last year to source some parts from Wistron, and Wistron is cooperating with FPI on this business. I believe this is one key reason FPI has increased revenue and better margin from 2020. Based on Sonos website here, Sonos is expecting another 12% to 16% growth next year.

• Plant and machinery is an important asset for the business of FPI. In view of high depreciation charge taken by FPI, I made a summary how much capital expenditure in plant & machinery is relative to depreciation. This could be a useful hint on how business of FPI is doing. Below is summary of PPE addition vs deprecation since 2016. For EMS company, capital expenditure also gives a hint how the management feels about the future orders.
  • 2016, RM15 million addition vs RM5 million depreciation
  • 2017, RM11 million addition vs RM6 million depreciation
  • 2018, RM12 million addition vs RM7.5 million depreciation
  • 2019, RM4 million addition vs RM8.7 million depreciation
  • 2020, RM3 million addition vs RM7.6 million depreciation
  • 2021, RM5.5 millin添加 vs RM7.2 million 折旧

• In FY2021, FPI had very high capex compared to previous year. I was hoping this was a sign of expansion. Unfortunately, with a little more study, it was found the capex was used to purchase property that was previously rented. So there is no increase of production area.

• Dividend payout of FPI stands at 35% for FY 2021.

End

FPI has a very healthy balance sheet. Although it does not have a dividend policy in place, with its net cash position, I believe FPI will continue to distribute part of its profit as dividend.

FPI has made a record high profit of RM96 million in FY2021, and that was due to higher revenue coupled with better margin.

There is rumor that following closure of Sony factor at Penang, some works will be transferred to FPI. This question was asked during AGM, however due to non-disclosure agreement signed with customers, management could not disclose anything.

Ever since 2015, dividend distribution of FPI has been growing. For FY2021, FPI declared dividend of 20 cent, 43% higher than 14 cent declared in last year ! It is too early to tell if FPI can increase or at least maintain 20 cent of dividend in 2022. However from the performance up to Q2, it is not impossible.

There is no mention about prosperity tax in the quarterly reports, so I guess it has no impact on FPI.

A good factor for FPI in 2022 is strong USD against MYR, due to rapid rise of interest rate in US to tackle inflation. As a result, revenue and profit reported in MYR will become higher. From 2022 quarterly reports so far, I feed indeed strong USD has provided a good support to business of FPI financially, while the economy in overall is facing headwinds. The pace of interest rate hike in US is expected to remain strong in second half of 2022, so I guess FPI can still enjoy the forex advantage for some time.

With current share price of about RM3.1, if FPI can at least maintain its dividend of 20 cent, the dividend yield of 6.4% is still quite attractive.

In case you want to know more about dividend investing, feel free to check out my article about ultimate guideline for dividend investing here.

Disclaimer: This article is purely my notes from studying this company. This is not a BUY or SELL call. I am not a registered investment advisor nor an investment guru, please be reminded to do your own homework and invest at your own risk.