Faber9, Reason for 600% Dividend Payout Ratio Despite Sharp Profit Decline

Net Profit Drops 97%... Dividends Exceeding Earnings
Most Shares Held by CEO Lee Je-hoon Used as Collateral Loan

KOSDAQ-listed company Pabernine paid dividends amounting to seven times its profits last year despite a sharp decline in earnings. The market believes that the stock-backed loan of the largest shareholder, CEO Lee Je-hoon of Pabernine, influenced this decision.

According to the Financial Supervisory Service's electronic disclosure on the 4th, Pabernine resolved at the regular shareholders' meeting on the 28th of last month to pay a dividend of 70 KRW per common share, totaling 877.44 million KRW. The cash dividend yield is 2%.

Pabernine is a company that produces TV exterior products, medical devices, automotive parts, and home appliances by utilizing precision processing and surface treatment of aluminum alloys. Its major customers include Samsung Electronics (Samsung Medison) and global appliance company GE.

Last year, Pabernine recorded consolidated sales of 120.7 billion KRW, operating profit of 1.7 billion KRW, and net profit of 145 million KRW. While sales increased by about 2%, operating profit and net profit decreased by 83% and 97%, respectively. On a separate basis, the company posted an operating loss of 1 billion KRW, turning to a deficit.

The company explained, "Costs increased due to new investments such as the establishment of a U.S. subsidiary in 2022 and a Mexican subsidiary last year, which led to decreases in operating profit and net profit."

Looking in detail, the consolidated cost of sales increased by 11.6%, resulting in expenses exceeding the increase in sales. The 'Other' category, which accounts for one-quarter of the cost of sales, rose to 27.5 billion KRW, up 35.4% from the previous year. The company explained that the 'Other' category includes consumables and outsourced processing costs but did not disclose the exact reasons for the increase in other expenses.

Despite the sharp decline in performance, Pabernine paid dividends amounting to about seven times its net profit. The consolidated cash dividend payout ratio was 600.6%. Pabernine started paying dividends last year, distributing 1.264 billion KRW in dividends. Last year, Pabernine earned 6.3 billion KRW in consolidated net profit but posted a net loss of 200 million KRW on a separate basis.

The market is citing the largest shareholder's stock-backed loan as the reason why Pabernine continues to pay dividends despite declining earnings. CEO Lee Je-hoon, the largest shareholder, has borrowed about 5.7 billion KRW using most of his 2,997,949 shares (20.98%) as collateral. If all collateral rights are executed, Lee's stake would decrease to 1.23%.

Lee's stock-backed loan interest rate is known to be in the 5% range, meaning he pays about 300 million KRW annually in interest alone. It is estimated that Lee will receive about 200 million KRW from this dividend.

The shortfall from dividends is expected to be covered by salary. Last year, Lee received 700 million KRW in salary, about five times Pabernine's net profit. Lee has received a salary of over 500 million KRW since 2018 and increased it to 700 million KRW starting in 2021.

A Pabernine official stated, "In the past, the CEO's salary was low, but since 2020, profits from Vietnam increased significantly, leading to a raise in the CEO's salary, and dividends have been paid since 2022. The CEO's stock-backed loan, salary, and dividends are unrelated."