Gtronic is a technology stock producing various type of sensors and LED. Among technology stocks, Gtronic has a very generous dividend payout. In the past 2 years, Gtronic even distributed 100% of its earning as dividend. Gtronic is a net cash company with zero borrowing, so indeed it has the capability to do so. Having say that, although it has a high dividend payout, due to its relatively high share price in the past, its dividend yield is not very attractive. In the past year, unlike the other dividend stocks, Gtronic did not manage to get a lot of businesses, so its share price has hit a new low. Let’s look into this company whether it is a good dividend stock with growth potential.
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Company background of Gtronic
Full name of Gtronic is Globetronics Technology Berhad. It was formed in 1991 in Penang, listed in 1997 and started manufacturing of sensors in 2012. Its current market capitalization is around RM1billion. Main product of Gtronic is smart sensors used in various smart devices such as smart phones, ear phones and wearing devices. Other products of Gtronic includes LED, integrated circuit etc.
As of financial year 2021, founder of Gtronic Mr. Michael Ng Kweng Chong owns 4.6% of shareholding. However the biggest shareholder of Gtronic is actually EPF, with 9.4% of shareholding.
In 2019, Gtronic decided to stop production of labor-intensive timing devices, and focused more on other products with higher margin and better value addition. At the end of 2021, Gtronic has completely stopped production lines of timing devices and Quartz Crystal. I believe it is a good move in long term as this would improve the margin of the company. However it might come with short-term impact, depending on how soon the company can find new businesses to fill the idling production capacity.
Gtronic is not only a manufacturer, it has design capability also. many of its products are actually developed together with its customers. Last year, many technology sector companies in Malaysia received higher than usual orders, but this does not include Gtronic. According to management, this is because many projects in collaboration with customers are on hold or delayed due to the pandemic.
Main products
Products started mass production in 2020
- Gen 4 light sensor for European customer (AMS?)
- Gen 3 motion sensor
New products to start mass production in 2021
- Gen 5 light sensor for European customer (AMS?)
- Gen 2 gesture sensor
- Gen 3 motion sensor
Tax incentive
Gtronic is a company with pioneer status recognized by MITI Malaysia. Company with pioneer status can be exempted for income tax under certain conditions. In FY2021, Gtronic made RM52 million of gross profit and RM50 million of net profit. Among the two numbers, tax saving granted because of pioneer status is as mush as RM13.5million. However pioneer status of Gtronic will expire in June 2022. Unless it can be extended as approved by MITI, otherwise it would have a significant impact on net profit afterwards. According to report from Aminvestment bank here, the impact of pioneer status expiration would be partially cushioned by its unabsorbed tax allowance. According to annual report FY2020, unabsorbed tax allowance available is around RM7million, and it comes to total of RM31million with other type of tax allowances. However I don’t know what is the condition to utilize these tax allowances. I think we would have a clearer picture in second half of 2022 after expiration of pioneer status.
Concentration risk
In FY2021, 79% of revenue was contributed by two major customers. Among them, the biggest customer is AMS AG, which is one of the main supplier of Apple phone. There was news that AMS lost some of the Apple orders in 2021, but based on my research, the order lost was for face recognition sensors, and that was not something that Gtronic produces. However if AMS continues to lose orders from Apple, then we have to cautious on its impact to Gtronic.
Financial
Net cash company
Gtronic does not have any borrowing, is a net cash company with RM195 million or 27 cent per share of cash.
Dividend payout
As far as I know, Gtronic does not have a dividend policy in place, however its dividend payout record is solid. Below is summary of its dividend payout since 2016, and it can be seen that dividend payout is more than 100% of net profit for some years. Especially in 2016, the dividend payout was extremely high when Gtronic decided to distribute its unnecessary cash on hand to shareholders. For the past three years, if we consider dividend payout relative to operating cash flow instead of net profit, it is actually reasonable. The operating cash flow is much higher than net profit mainly because of non-cash expense related to depreciation.
| Financial Year | Dividend Payout | Dividend / Operating Cash Flow |
| FY2016 | 252% | 111% |
| FY2017 | 89% | 145% |
| FY2018 | 82% | 49% |
| FY2019 | 112% | 45% |
| FY2020 | 99% | 58% |
| FY2021 | 95% | 59% |
Capital expenditure and depreciation
For manufactures, level of capital expenditure and depreciation is very often a good indicator to predict its upcoming performance. Below I’ve summarize capital expenditure and depreciation of Gtronic since FY 2016. It can be seen that higher capex happened in FY 2017 & FY2018, and indeed Gtronic had significant growth in those years.
| Financial year | CAPEX | Depreciation |
| FY2016 | RM 8 million | RM20 million |
| FY2017 | RM104million | RM28 million |
| FY2018 | RM36 million | RM37 million |
| FY2019 | RM17 million | RM38 million |
| FY2020 | RM18 million | RM41 million |
| FY2021 | RM10 million | RM27 million |
With its RM195 million of cash on hand, there is no problem to increase CAPEX as long as there is a demand.
Financial Highlights (Quarterly Report FY2021 Q4)
- Revenue of FY2021 Q4 is 23% lower than the corresponding quarter last year. However its gross and net profit are almost the same. According to the explanation from the company, that is because of adjustment in accrual of expense. If looking at numbers on the financial report, it can be seen the deprecation expense is much lower. For me personally, I was expecting a better result considering opening of economy in Q4 last year.
- For the full FY2021, the result is not very good. In fact, its revenue recorded is the lowest in 10 years. Although net profit did not come down as much as the revenue, but one of the reasons is lower deprecation expense of up to RM14 million compared to last year. Excluding this, its net profit would also be the lowest in 10 year.
The end
As a manufacturers of smart sensors and LED, I believe it is fair to say that Gtronic is in a sector with very bright prospect, such as 5G, electrical cars, automated driving etc. However whether Gtronic can compete and gain more orders, only time will tell. For the past one year, we can see that Gronic did not get as much as orders than other technology stocks.
In the 2019 annual meeting, management did mention that its LED headlamp products had been approved by US authority, and would start to be incorporated into Germany cars (Volkswagen?). And in the 2021 annual meeting, management also mentioned that company was working with some customers to develop sensors used in automated driving. Therefore whether Gtronic can get more orders from the auto industry, is still something the worth looking forward to.
On the other hand, with the expected rise of interest rate in the US to tackle inflation issue, there is a possibility of US dollars strengthening against MYR. If this happens, this would be good to Gtronic as their orders are mostly in USD but financial reporting is in MYR.
For a company in a highly growing industry, I didn’t feel Gtronic being a beneficiary in 2021. In contrast, it seems its growth is losing momentum, and its declining CAPEX expenses are reflecting the same thing. Therefore, it is totally understandable why its share price has dropped so much in the past one year. Coming to 2022, its pioneer status expiring in June and impact of stopping production of Quartz Crystal and timing devices are yet to be seen. I would continue to monitor if its prospect becomes more visible in coming quarters.
One final note, the current 65 years old CEO of Gtronic will retire in June 2022, and his 38 years old daughter will take over the post. Whether this would bring any change to Gronic, time will tell.
