Friday 29 Mar 2024
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This article first appeared in The Edge Malaysia Weekly, on March 20 - 26, 2017.

 

AMID the rally in semiconductor stocks, MMS Ventures Bhd (MMSV) has largely gone unnoticed due to its listing on the ACE Market. Many large funds simply do not have the mandate to take positions in ACE Market stocks.

Even with a 27% rally in its share price over the past two weeks to 75 sen per share last Thursday, MMSV is valued at only 12.6 times earnings. In contrast, larger semiconductor stocks like Globetronics Technology Bhd and Inari Amertron Bhd are valued at 52.8 times earnings and 21.65 times earnings respectively.

But MMSV may soon shed its ACE Market discount.

“We hit the net profit requirement back in 2015. We only need three years cumulative net profit of RM20 million to qualify for a promotion to the Main Board. It is something that we are planning. If all goes well, we might be on the Main Board by the third or fourth quarter,” says chairman and managing director Sia Teik Keat, adding that the final decision lies with the Securities Commission Malaysia.

With a cumulative net profit of RM33.08 million over the past four years, MMSV should not have a hard time securing SC’s approval.

Furthermore, Sia expects MMSV’s 1H2017 net profit performance to further build a case for promotion to the Main Board.

“Barring any unforeseen circumstances, we anticipate that earnings will be at least 20% higher in the first half,” he says.

MMSV booked a 13.7% year-on-year increase in revenue to RM35.6 million for the financial year ended Dec 31, 2016. Meanwhile, net profits rose by 17.8% y-o-y in the same period to RM9.52 million.

A 20% increase in net profits for FY2017 would translate into an earnings per share of 7.1 sen. In turn, that values the company at only 10.5 times forward earnings.

Sia is able to speak confidently about earnings prospects because the project-based nature of the group’s core operations offers earnings visibility.

MMSV produces testing and inspection equipment for LEDs, specifically, for smart devices, the automotive industry and general lighting as well. The inspection equipment has to be ordered by LED manufacturers ahead of a new product cycle.

New features are expected in this year’s line-up of smartphones — expecially Apple’s 10th anniversary iPhone 8 — that will act as a catalyst for semiconductor companies such as MMSV.

This year, Sia says orders from new customers as well as MMSV’s diversification into wafer inspection equipment will drive earnings growth.

“We managed to secure some new clients for our visual inspection equipment this year. On top of that, our wafer inspection is still on a low base. We have only received orders for the first few units; we expect this segment to grow,” he explains.

Sia says MMSV diversified last year into inspection machines for the LEDs semiconductor wafers — thin slices of crystalline semiconductor material.

“The degree of difficulty for wafer inspection is much higher. It is a high value machine that commands higher margins. It also has less competition.”

The group’s venture into wafer inspection is a direct result of research and development investment over the years, he adds. For now, MMSV has secured two customers for the wafer inspection machines, but expects the business to grow because the platform for the machines is relatively universal.

The main driver of MMSV’s earnings however, will continue to be the visual and inspection equipment for LEDs.

“One of our key products are visual inspection machines to inspect lenses for the flash in smart devices. Our clients include the top four LED makers in the world,” says Sia.

Currently, the smart devices segment makes up about 40% of profits. Automotive makes up about 25% while 10% comes from general lighting.

Going ahead, however, Sia anticipates more sales in MMSV’s smart devices segment that will increase its contribution to profits to 55%.

“Our automotive segment has a lower volume, but much higher margins. This is because automakers have longer product cycles and tight tolerances for quality. Smart devices have much higher volume, because phone makers are constantly launching new products. However, it is also more competitive, so margins are a little lower,” he notes.

Sia claims MMSV’s technology is on a par with its Taiwanese peers. However, MMSV boasts a cost advantage, with a substantial portion denominated in ringgit. Meanwhile, the bulk of MMSV’s earnings are in US dollars.

“We have been doing this for about 20 years and have a strong pool of technical expertise. Japan, for example, is ahead of us. But they are more expensive as well,” he says.

Between higher profits and the possibility of a Main Board listing, MMSV will certainly be an interesting stock to watch this year. However, it is also interesting to note that beyond the improved profile, the company does not have much need to move to the Main Board.

Specifically, MMSV does not need a transfer to the Main Board to raise funds. The group is currently sitting on cash of RM17.8 million and has zero borrowings. That translates into a net cash per share of 11.1 sen.

“MMSV has about 1.9 million treasury shares as we do buy backs from time to time when the share price is low. We will be able to place these shares out to funds interested to take a position in the company. However, we have no intention for now to place out new shares to raise funds. We have enough cash,” Sia says.

Another option would be for the company’s major shareholders to place out their shares. Sia himself has a 22.6% stake in the company.

For now, MMSV does not have any immediate plans to reinvest the large cash pile to scale up the business. Sia is content to place the funds into investments like unit trusts and the equity market for the time being, while seeking acquisition opportunities that can create synergy with MMSV.

There are no immediate plans to boost dividend payments either, says Sia, who is content to maintain the existing payout ratio in excess of 30%.

 

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