Goldpac Group Limited

Goldpac (‘Group’) provides embedded software and secure payment products for financial institutions, governments, and other companies in the healthcare, transportation, and retail industries.

It generates 60% of its revenues from ‘Embedded software products’ (ESP), 16% from ‘Data processing’, and 24% from ‘Equipment’ sales – with the latter two categories clubbed under ‘Platform and service’ segment (PS). Mainland China contributes 92% of revenues, and Macau contributes 8%.

Sales in the ESP segment declined 30.5% over the year during Covid-19, but this was offset by revenue growth of 23.8% in the PS segment due to increased demand for ‘contact-free’ services and the group’s AI self-service kiosks. Margins are also higher in the PS segment (36% pre-tax) compared to the ESP segment (23% pre-tax) – resulting in a lower decline in the bottom line.

The group reported sales of $1.5b (2019: $1.6b) and earnings of $190m (2019: $201m) in the last twelve months. Earnings were backed by strong operating cash flows.

The financial position is very strong with net cash of $1.3b and net current asset value of $1.6b. Net tangible equity was $2.2b.

Net cash doesn’t include $134m of liquid, principal-protected, variable-return wealth management products offered by established banks. There were aged unprovided receivables of $90m and $30m of losses taken on investments in associates, partially offset by $68m in fair value of investment properties - but the net impact on value isn’t significant.

The stock was selling for $1.2b, less than net working capital value, and 6.3x depressed earnings.

Just as impressive, are the high and consistent dividend payouts aggregating nearly 80% of earnings, yielding 14% on the current price. The interim dividend dropped from four cents to three – but the dividend yield is still generous.

Management intend to consolidate the group’s competitive strengths, expand its product portfolio (particularly the AI self-service kiosks), and expand into overseas markets – though there is no indication they will be financially reckless about it. They’ve currently earmarked a modest $120m in capital commitments to construct a “fintech center”.

Though the industry is fast-changing, the group has demonstrated a good financial track record with healthy margins, and management have been generous with shareholders.

This seems to us to be an undervalued stock and a suitable component of a group investment in common stocks.