KUALA LUMPUR: Formosa Prosonic Industries Bhd (FPI), a manufacturer of sound systems, has seen its share price fall by 12.92% year to date to 77.5 sen last Friday after trading as high as RM1.04 at the beginning of the year. Backed by generous dividends, is it worthwhile investing in the company?

While its share price declined this year, what’s surprising is that during this time, FPI’s cash pile increased to RM171.4 million or 69 sen per share as at June 30, 2016 from RM158.2 million or 64 sen per share as at Dec 31, 2015. Free of borrowings, FPI’s cash in hand alone represents 89% of its share price at the moment.

While FPI has been prudent in conserving cash, the group has also been rewarding shareholders in the form of dividends. For the financial year ended Dec 31, 2015 (FY15), the group declared and paid a first interim single tier dividend of seven sen per share, amounting to RM17.3 million, translating into a dividend yield of about 9.03%.

FPI does not have a dividend payout policy in place but it has been paying dividend of at least three sen per share since FY09, resulting in a yield of at least 3.87% based on its current price.

One of the company’s officials shared that the cash buffer is a strategic asset for the group.

“It will be important to have a strong cash buffer during a slowdown in the economy. We have also invested quite a fair bit into machinery. When the need arises, the company will not hesitate to invest, whether in new products or to expand capacity,” he said.

In terms of its valuation, FPI is trading at a trailing price-earnings ratio (PER) of only nine times while other consumer electronics such as Acoustech Bhd and Panasonic Manufacturing Malaysia Bhd have a PER of 15.15 times and 14.5 times respectively.

Looking at its income statement, the group has been generating both net profit and positive operating cash flow every year since its listing in 1994. Perhaps one of the concerns would be its recent financial performance in the first two quarters of FY16.

In the second quarter ended June 30, 2016 (2QFY16), stripping out the gain on disposals of subsidiaries totalling RM4.9 million, FPI registered a profit before tax of about RM900,000 million. In 1QFY16, FPI saw a loss before tax of RM3.1 million, excluding the gain on disposal of an associate of RM2.3 million.

The decline in its performance in the first half ended June 30, 2016 was attributed to higher operating costs and loss on foreign exchange in 1QFY16. The slowdown in global economic growth, restrictive labour supply and policies and higher minimum wages also resulted in higher operating costs.

The recent decline in profitability has cast doubts on the group’s prospects moving forward but FPI appears to be committed to the manufacturing and selling of high quality speaker systems. According to a source, the main reason for FPI’s disposal of a 27.8% stake in Acoustech was due to the latter’s intention to diversify into other business such as property development.

The market also appears to show a lack of interest in the company based on its average trading volume. The group’s three-month average volume was only 52,300 shares as compared with its 12-month average volume of 250,371, reflecting a decline by more than half in investors’ interest.

The group’s substantial shareholders, representing a 54.9% stake, however have maintained their ownership.

FPI’s largest shareholder Wistron Corp, a Taiwan-based company, bought its stake in 2014 and still holds 69.3 million shares, representing a 28% interest in FPI.

Permodalan Nasional Bhd owns a 21.64% stake with 53.5 million shares while Chang Song Hai, a Taiwanese, owns 13 million shares or 5.36%.

With a strong track record, low PER and strong fundamentals as well as consistency of its dividend payout, is FPI undervalued?

Malacca Securities technical analyst Loui Low Ley Yee told The Edge Financial Daily that FPI’s fundamentals are good but indicated that its low trading volume is a risk.

“The volume is not there. It is rather illiquid and it could be a risk because once you get in, it might be difficult to get out. Currently, the floating stock is only about 19.58% and liquidity could be an issue if investors opt to enter into the investment,” Low said.

While liquidity may have been an issue, an investor who invested in FPI for the long term in the past would have been well rewarded. Its annualised return inclusive of the reinvestment of dividends paid over one-, five- and 10-year periods are 25.29%, 8.71% and 15.31% respectively.