In the last few years Legend has made a series of acquisitions, and restructured its business, such that it is more exposed to residential and infrastructure construction, as well as focusing its product development on growth areas of the economy.
Legend Corporation (LGD) is one of the many unsung micro-cap companies on the Australian market. Capitalised at $53 million, the Adelaide-based company – which has been listed on the Australian Securities Exchange (ASX) since 2004 – has built a solid business over that time, by both acquisitions and organic growth.
Legend provides engineering solutions to a wide range of industries, including the electrical, information technology, mining, semi-conductor, rail, defence, medical and power utility sectors.
The company’s brands are:
- CABAC: designs, makes and distributes an extensive range of more than 28,000 product lines to the electrical industry, engineered and tested to Australian standards. Products include electrical connectors, cable jointing systems, related tools, test and measurement instruments, cable management, structured wiring systems, copper and fibre connectivity, low and medium voltage power connectivity products and ancillaries.
- Legend Performance Technology: serves the IT, data centre, audio-visual, security, POS (point-of-sale), education, corporate computing and broadcast markets. Legend Performance Technology supplies a wide range of proven memory, data racks and cabinets, UPS, special cables and data rack environment management products, including protocol data units (PDUs) and patch panels for system integrators, network hardware and cabling, tools and accessories.
- Hendon Semiconductors: designs and manufactures unique integrated circuits (ICs), thick film hybrids and printed circuit board module assemblies.
- Legend Power Systems: serves the power generation, transmission and distribution; rail; and resource engineering markets. Legend Power Systems supplies power electrical connectivity, special tools, jointing systems and electrical safety products to meet the diverse requirements of overhead and underground power transmission and distribution. The division’s two in-house NATA laboratories undertake continuous product testing to ensure product compliance with Australian and New Zealand standards.
- Legend Defence Industries: designs and makes advanced engineering solutions for the Australian Defence Force, supporting the ADF’s complex defence systems. With over 30 years’ experience in advanced electronics manufacture, Legend has been integral in delivering some of the ADF’s most advanced systems: the company has designed and manufactured kit such as the Kariwara towed arrays used in the Collins Class submarines and the ANZAC frigates; the Nulka missile decoy system; Barra sonobuoys; and the Mulloka on-board ship sonar system.
- MSS Fibre Systems: specialises in the supply of high-quality fibre-optic cabling products and services to Data and Data Centre and Telecommunications industries.
- Ecco Pacific: supplier to the New Zealand electrical industry.
- Legend Alliance: the project specification team of Legend Corporation. In partnership with the group’s channel distribution partners, Legend Alliance seeks to develop new business opportunities for Legend’s brands and engineering capabilities.
Legend has manufacturing facilities in Adelaide, Sydney and Melbourne, and distribution centres in those three cities, as well as in Perth and Auckland. The company also has two National Association of Testing Authorities (NATA)-certified laboratories, in New South Wales and South Australia, certified to carry out a broad range of necessary Australian Standards testing on all of its products.
Like many companies, Legend enjoyed the resources construction boom, but is now caught on the flipside – in the perception that its earnings depend too much on the resources industry. However, in the last few years the company has made a series of acquisitions, and restructured its business, such that it is more exposed to residential and infrastructure construction, as well as focusing its product development on growth areas of the economy, notably energy-efficient and energy-saving products for lighting, switching and power management. Legend has also worked to expand its range of specialised equipment for power utilities.
As this repositioning has been undertaken, financial performance has been mixed. In FY13, despite revenue rising from $103.2 million to $105.3 million, Legend reported a 29% fall in net profit, to $6.7 million. FY14 saw revenue slip 3% to $102.1 million, and net profit come in unchanged at $6.7 million, in what the company said was a flat market environment, with lower-than-expected client demand.
However, operating cash flow improved in FY14 by 47%, to $9.8 million, while operating costs fell by 7% – always a good sign. Total net assets stood at $64 million, or 29 cents a share, while interest cover was a healthy nine times, and net debt-to-equity was an untroubling 20%. Legend said in the FY14 report that it expected “an improvement” in its FY15 result.
Then, for the half-year to December 2014, revenue fell by 8.2%, to $48.2 million, while net profit edged 3.3% higher, to $3.6 million. But Legend was able to lift margin to 45.5%, up from 43.1% in the December 2013 half, as it introduced higher-margin products. However, a weaker A$ is not good for Legend: about 65% of the company’s cost of goods is bought in foreign currency, giving it a higher landed cost as the dollar weakens.
Recent financial performance does not inspire a huge amount of confidence in the stock. Over the last 12 months, Legend has delivered a negative total return (capital growth plus dividends) of –26.27%, and is also running at a loss over three years, at –5.9% a year. You have to go back five years to get positive performance, and even then Legend hardly shoots the lights out, having delivered holders a return of 11.6% % a year.
But where some investors might well be very interested in the stock is that Legend is typically a strong generator of excess cash from its operations, and has a track record of very healthy dividend payments. In FY14 it paid a fully franked dividend of 1.8 cents a share: at the current share price of 24 cents, that equates to an historical fully franked yield of 7.5%.
Analysts see Legend retaining that dividend in the current financial year, so the prospective FY15 yield is the same, but the company is forecast to lift its full-year dividend to 1.9 cents a share in FY16, which would place it on a prospective fully franked yield of 7.9%. And Legend is sitting on a pile of unused franking credits of $18.2 million, and says it is reviewing how this balance could deliver value to shareholders – so that healthy yield could well be augmented further by a special dividend at some stage.
