This article first appeared in The Edge Malaysia Weekly on April 17, 2017 - April 23, 2017

SEMICONDUCTOR stocks have put on a stellar performance this year, riding the eighth- generation smartphone hype — highly optimistic expectations for Apple’s upcoming iPhone 8 and Samsung’s potentially redeeming Galaxy Note 8.

Meanwhile, tech stocks without skin in the smartphone game have fallen off investors’ radar screens.

Last week however, Willowglen MSC Bhd took the market by surprise when it hit limit-up on Monday at RM1.32 per share. That is more than double its share price six months earlier, earning it an unusual market activity (UMA) query from the exchange. The company replied that it was unaware what might have caused the run-up in its share price.

What does Willowglen do and is the rally justified?

The company is a SCADA and security solutions provider. SCADA, or supervisory control and data acquisition, is a control system for aggregating remote data for the purpose of monitoring a large system.

For example, Willowglen supplied a SCADA system for a pipeline in Slovenia in 2003. Today, maintainence of the system generates recurring income for the company.

At face value, it doesn’t sound as exciting as the semiconductor companies riding the smartphone boom, with big multinational clients and ever-expanding orders. Instead, Willowglen has to focus on securing one job at a time.

That said, group managing director Wong Ah Chiew is optimistic about the group’s prospects this year.

“So far, we have a tender book of about RM400 million, about 80% of which is for work in Singapore. This is much larger than our order book in the past, and there are more jobs we are looking to compete for this year. Thus, I am optimistic about 2017. It should be a better year for us,” Wong tells The Edge.

For perspective, Willowglen’s revenue in FY2016 ended Dec 31 was RM132 million, rising 10.7% year on year. Earnings remained relatively flat, up 1% to RM18.28 million, which works out to 7.51 sen per share.

In turn, the company is being valued at 16.38 times earnings based on its closing price of RM1.23 last Friday, down 10.8% from the limit-up high of RM1.38.

Against this backdrop, is there more upside, and what could possibly drive it?

Wong says Willowglen is looking to secure more work in Malaysia. After all, there is a huge pipeline of infrastructure projects that would require SCADA systems.

The company supplied SCADA systems for the first and second light rail transit (LRT) lines, as well as highways such as the Duta-Ulu Kelang Expressway Phase 2 (DUKE 2) to monitor traffic conditions.

And the many highway and public transport projects in the midst of tendering or about to tender should bode well for its prospects. In the Klang Valley alone, there is the third phase of the DUKE expressway, the Damansara-Shah Alam Elevated Expressway (DASH) and the Sungai Besi-Ulu Kelang Elevated Expressway.

Meanwhile, in the city centre, several big-ticket rail projects are in the works, such as the second mass rapid transit line and the third LRT line. Projects outside the city include the Gemas-Johor Baru double-tracking and electrification works, proposed East Coast Rail Line and KL-Singapore high speed rail.

In other words, Willowglen could be seen as a non-construction beneficiary of the country’s infrastructure gold rush.

Unlike construction work, however, SCADA systems require long-term maintenance and support.

“Roughly 20% of our Singaporean revenue is recurring, from maintenance contracts. The recurring income portion in Malaysia is a little less,” says Wong, noting that such maintenance contracts tend to boast better margins.

About 70% of Willowglen’s earnings come from Singapore, where a major client is the Housing Development Board. SCADA systems monitor elevators, security and even residential gas pipelines.

Most of the remaining 30% of revenue comes from Malaysia, with a small portion from international operations.

Another potential area of growth will be work with Tenaga Nasional Bhd (TNB), says Wong.

Last month, the company announced that it had been awarded a RM7.82 million TNB contract for “testing and commissioning of secondary remote terminal unit for motorised RMU substation for distribution automation project.”

“SCADA systems are for remotely collecting data. The more remote and spread out it is, the more crucial a good SCADA system is. We have been eyeing TNB as a client for a long time. It has a lot of remote substations that cannot be manned around the clock,” Wong explains.

If all goes well, this first contract may pave the way for more work with TNB in the future.

In fact, this is one of the reasons Willowglen has consistently been a favourite pick for InsiderAsia.

“TNB is the biggest user of SCADA systems in Malaysia with annual investments to the tune of hundreds of millions of ringgit,” InsiderAsia wrote in a report after Willowglen had qualified as a registered vendor.

Another aspect that makes Willowglen attractive is its healthy balance sheet. As at Dec 31, 2016, it had net cash of RM41.03 million and virtually no borrowings. That translates into net cash per share 16.8 sen.

However, the cash-rich balance sheet will not translate into higher dividend payments in the foreseeable future, says Wong, who is content with the company’s existing 20% payout ratio.

Instead, it will be holding on to its cash to prepare for bigger projects as well as potential mergers and acquisitions.

“We are exploring one or two companies now, but [there is] nothing concrete yet,” Wong  says.

Last year, Willowglen acquired a Canadian SCADA company that specialises in flow computing, which is applicable for oil and gas as well as water utilities. Wong says the Canadian venture is already breaking even and should begin contributing stronger earnings this year.

However, it has been a slow start for the group’s 50:50 venture in Indonesia, which incurred losses in FY2016.

“It has been more difficult  than expected to break into the Indonesian market. Most of our losses there are just from overheads. But we are putting together some small projects here and there that hopefully, will help us break even this year,” Wong says.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.