Insider Asia’s Stock Of The Day: ELSOFT (04/08/2015)

Tue, 4 Aug 2015, 09:52 AM

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Insider Asia’s Stock Of The Day: ELSOFT (04/08/2015)

Insider Asia’s Stock Of The Day: Elsoft

 

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ELSOFT Research Bhd (Fundamental: 3/3, Valuation: 2.1/3) offers investors an exposure to the robust growth in mobile devices and the increasing use of LED (light emitting diode) in consumer products. 

The Penang based technology player designs and develops automated test equipment for companies to inspect LEDs. LEDs are a component in printed circuit boards used mainly in the semiconductor, consumer products, optoelectronic and automotive industries. 

Elsoft recently completed its transfer from the ACE to the Main Market on Jan 22. The MSC-status company has also just successfully renewed its pioneer status and will enjoy tax exemption for the next 10 years until 2025. 

Its underlying business has been doing very well. Revenue grew at a CAGR of over 41.4% between 2010 and 2014, to RM45.14 million. Net profit grew by an outsized 50.4% annually over the same period, to RM 19.78 million. Elsoft runs a lean ship, with just 61 staff, translating into a high productivity of RM740,000 of revenue per employee. 

Moving forward, Elsoft plans to expand its customer base and produce LED testing equipment for medical devices, which it expects to boost revenue by 20%. Meanwhile, its associate company, Lesoshoppe is seeking to list on the ACE market, to fund the expansion of its trading equipment business in Thailand, Indonesia and the Philippines.

Elsoft has a strong balance sheet with double-digit ROE and is in a net cash position of RM32.3 million. This is supportive of its minimum 40% dividend payout policy. 

Indeed, Elsoft has been rewarding shareholders with more, paying 50-73% of annual earnings in 2011-2013. Recently, Elsoft declared a dividend of 5 sen per share, bringing the total dividends in 2014 to 7 sen which translates into a net yield of 4%. The stock is trading at a trailing 12-month P/E of 15.7 times, which is attractive relative to its strong double-digit growth.

This article first appeared in The Edge Financial Daily, on March 30, 2015.

ELSOFT - Diversifying into automotive and medical with technology

​Exchange: KLSE

Current Price: RM 1.870

Diluted Shares Outstanding: 181,132,000

Market Capitalization: RM 338.7 million

Public Float: 18%

Industry: Technology Equipments

QUANTITATIVE ANALYSIS

	Previous FY	TTM	MRQ	Criteria (Annualised)
Valuation
Historical P(EBITDA)R	11.23	13.09		<10
Trailing PTBV		4.21
Dividend Yield	2.1%	-
Capital Structure
Long Term Debt/Total Asset	0.8%	0.6%		<30%
Total Debt/Total Asset	6.7%	5.1%		<60%
Management Effectiveness
ROE (use EBITDA)	29.2%	41.9%	6.5%	>15%
ROA (use EBITDA)	26.4%	38.7%	6.2%	>6%
ROIC (use EBITDA)	27.2%	39.7%	6.4%	>4%
Liquidity
Cash Ratio	1.84	3.80
Quick Ratio	6.39	13.24		>0.8
Profitability
EBITDA Margin	47.5%	49.1%	49.3%	>5%
EBITDA (cents)	11.85	13.89	2.80
Cash Flow
Operating Cash Flow/Net Profit	0.69	0.77	0.61	>0.5
Free Cash Flow/Net Profit	0.66	0.75	0.59	>0.2

		YoY	QoQ	Criteria
Growth
Revenue		79.0%	144.6%	>10%
EBITDA		82.6%	265.1%	>5%
EBITDA/Equity		50.7%	188.9%	>0%

Comment: Valuation ratios failed slightly whereas all other criterias pass with flying colours. This is fine for a technology stock.

QUALITATIVE ANALYSIS

Advantages: Large cash holdings in USD to further boost company performance. ELSOFT also has a pioneer status for 100% tax exemption on its earnings. Business is also well diversified to prevent dependence on growth of smart devices only. ELSOFT provides for other segments such as the automotive and medical industry.

Risks: ELSOFT may see increased competition from other companies such as MMSV, FRONTKN and INARI.

RESULTS

Target Price: RM 2.930

Potential Upside: 57% (based on current price)

Margin of Safety: 36% (based on current price)

Maximum Entry Price (Fundamental): RM 2.050

Recommended Entry Price (Technical): RM 1.780

Cut Loss: RM 1.600

Holding Period: Until end of August 2016 (After QR)