This article first appeared in The Edge Malaysia Weekly on May 7, 2018 - May 13, 2018

PENANG-based MMS Ventures Bhd, which is en route to the Main Market of Bursa Malaysia, is looking forward to joining the “big league” of the technology sector.

Despite its decent earnings, its ACE Market status had kept the company off the radar screen of investors. But with last month’s approval for a transfer to the Main Market, things are looking up for the group, which provides customised automation solutions for back-end semiconductor processes and light-emitting diode industries.

MMSV CEO Sia Teik Keat believes the migration after 12 years is what the group needs to gain prominence among institutional investors who are more familiar with other Penang-based tech companies listed on the Main Market, such as Globetronics Technology Bhd, ViTrox Corp Bhd, Elsoft Research Bhd and Pentamaster Corp Bhd.

“We hope the transfer will help us draw institutional investors such as the pension funds to the company,” he tells The Edge.

The group would also appreciate more attractive valuations, given that it is valued at 10.86 times historical earnings compared with Elsoft’s 22.79 times and Pentamaster’s 17.64 times. Earnings-wise, 2017 was a bumper year for MMSV as net profit and revenue more than doubled to a record high of RM21.06 million and RM75.57 million respectively.

“Our good performance last year was because we managed to capture contribution from two new types of machines for the smartphone segment. One of the machines has a vision inspection system to check and measure the complete unit of [a camera] flash while the other checks sensors for 3D facial recognition.

“Both machines were for two different customers based in Penang but with each serving the same end customer,” says Sia.

Every revolutionary upgrade to smartphones means more features to be tested, which means good business for companies that provide customised solutions, especially those like MMSV.

“You could be the primary source providing the solutions to the customer or the secondary source. But the volume assigned to the secondary source is usually much lower. So for our business, it’s either you are in or you are out,” observes Sia.

He remarks that repeating the group’s FY2017 success will not be easy as it takes time to develop new enhanced features for smart devices. Indeed, he expects a 10% to 15% drop in revenue in FY2018, given that MMSV is dependent on the end customer’s products.

“If there is a major change, we can get more business but if there are minor changes, less. Still, we expect 2019 to be a very good year for us as there will be a major change in the features of smartphones. We will start working on this in the second half of this year and we may even have a chance to invoice some of the new orders in the fourth quarter of 2018.”

MMSV has a total of 15 customers in the smart devices, automotive and general lighting segments, seven of which are major customers. The largest is a multinational lighting company headquartered in the Netherlands.

For FY2018, the group projects 40% of its revenue to come from smart devices, 30% from original equipment manufacturing (OEM),15% from general lighting and around 15% from automotive.

“In the OEM segment, we build as per the customers’ designs for their brands. The customers are mainly from the lighting or semiconductor industry but most of their products end up in smart devices. I would say our smart device and automotive segments generally deliver higher margins of about 10% to 15%,” explains Sia.

He also points out that 60% of the group’s revenue is ringgit-denominated. “About 40% of our collection is in US dollars but we also buy components in US dollars with 20% of our costs in the greenback. So, the net effect is around 20% to our bottom line.”

To stay lean, the group does outsourcing. “We outsource around 95% of our production and fabrication functions so that we don’t have much fixed overheads. The major expenses for us include the cost of hiring good and qualified design engineers. This is one of the main challenges we face, apart from vying for new orders,” says Sia.

It is worth noting that MMSV’s lean balance sheet showed a net cash position of RM33.15 million as at Dec 31, 2017, with no borrowings.

Since FY2014, the group has been paying its shareholders a two-sen dividend annually with the payout ratio maintained in excess of 30% in the last three financial years.

Analysts have started to notice the group’s progress. Maybank IB Research initiated coverage of MMSV in March and has a “buy” call on it with a target price of RM2.02.

“Though its clientele base and earnings potential are comparable to that of its closest peer, Elsoft Research, MMSV’s current valuation pales in comparison at FY2019 price-earnings of just 8.4 times compared with 15.9 times for Elsoft.

“Its transfer to the Main Market should nevertheless serve to enhance its visibility among institutional investors and narrow this valuation gap. MMSV’s attractive valuation also makes it a potential mergers and acquisitions target,” the research house says.

MMSV’s share price of RM1.42 as at last Thursday translates into a market capitalisation of RM227 million.

The stock has regained some ground since falling to a low of RM1.10 on April 4, slipping in tandem with other tech stocks after Taiwan Semiconductor Manufacturing Co Ltd — the world’s largest contract chipmaker and a key partner of Apple Inc — guided weaker-than-expected sales amid softer demand for smartphones.

Even so, Apple Inc’s 16% revenue growth in its second quarter ended March 31 on the back of its new iPhone X indicates continued robust demand for strong product innovation.

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