MMSV looking forward to next procurement cycle

Saturday 20 Apr 2024

This article first appeared in The Edge Malaysia Weekly on August 21, 2017 - August 27, 2017

FOR MMS Ventures Bhd, FY2017 is pretty much in the bag with a bumper second-quarter profit expected to be announced by the end of this month.

Matching this expectation is a whopping 170% year-on-year increase in MMSV’s share price to RM1.89 last Thursday.

But a surge in profit should not come as a big surprise. After all, the Penang-based group secures the bulk of its work in the fourth quarter and subsequently books in much of the billings in the second and third quarters.

“Most of our orders are delivered to clients in the second quarter, followed by the third quarter,” explains CEO Sia Teik Keat.

This is because the company operates in a fairly predictable annual procurement cycle, matching that of the wider semiconductor industry. Across the board, it has been a fantastic, if not record-setting, year for the industry.

In this booming sector, MMSV has a highly specific niche — it designs and manufactures the testing equipment for LEDs, such as those in cars, the flashes of smart devices and general lighting.

In other words, MMSV’s equipment tests LEDs for quality control. The group’s major clients include the Big Three LED makers in the world — Philips, General Electric and Osram.

While testing ranks pretty low in the production cycle of LEDs, it is an integral part of the manufacturing process.

“The five machines we have operating on three lines [in the automotive industry] probably test between 2.2 million and 2.3 million LEDs a year,” says Sia.

Looking ahead at the next procurement cycle, which will begin towards the fourth quarter, Sia is optimistic.

“We are seeing LED and its applications become more sophisticated. This requires more advanced testing techniques to ensure the quality,” he explains.

Sia is particularly looking forward to the introduction of 3D scanning sensors in smart devices. He estimates that the more sophisticated testing equipment will boost the value of new orders by 10% to 20%, at least.

“When the value of LEDs and sensors goes up, the sophistication of the testing equipment goes up even more,” he says, adding that even the LED used in the flashes of smart devices incorporates IC (integrated circuit).

At the same time, the adoption of LEDs in the automotive industry is growing quickly, both for energy efficiency and aesthetic purposes. LEDs are being introduced in car taillights and fog lamps, although they are still not widely used in headlamps.

It is also interesting to note that the procurement cycle has shortened over the past few years. Sia says it is unlikely to shorten further as the companies that produce smart devices are already in a highly compressed product cycle.

Against this backdrop, how should MMSV be valued?

After all, based on its share price performance alone, some investors might be worried that the risk is on the downside.

First, recall that MMSV booked a net profit of RM4.1 million in the first quarter ended March 31 on revenue of RM14.9 million. Simply annualised, the group’s full-year earnings per share would be 10.2 sen, giving it a valuation of 18.5 times earnings.

But as mentioned, the group’s profit is expected to peak in the second quarter and taper off during the rest of the year. In fact, MMSV’s second-quarter net profit alone is expected to exceed RM10 million. This means the company is trading much cheaper than 18.5 times earnings.

For perspective, semiconductor player Globetronics Technology Bhd is being valued at about 64 times historical earnings and 28 times forward earnings.

Unlike Globetronics, however, MMSV still needs to secure a new round of contracts for 2018 come the fourth quarter.

While this poses some risk to future earnings, Sia is confident of the company’s prospects for 2018. He tells The Edge that MMSV has already started to garner the interest of existing and new clients. This is due to a combination of factors. For starters, Sia says, MMSV is cost-competitive compared with Taiwanese or Japanese companies. On top of that, it is able to closely support clients, especially those based in Penang.

“If the client has an issue, we can have engineers on site the next morning. Even if it is a Sunday morning, we can support them so they can be up and running again on Monday,” explains Sia.

He also points out that clients tend to stick to vendors such as MMSV as long as they can meet their high quality expectations.

“Our machines are also quite modular, so we can upgrade them to meet clients’ needs as long as the product design is not changed completely. For example, if we need to upgrade from manual to automatic loading, we can easily do it. If we need to install new sensors, it is not a problem either,” he adds.

MMSV is also keen on growing its visual inspection machines for semiconductor wafers. This is a new line of business for the group, which Sia hopes will soon make up 25% of total revenue.

Note that wafer inspection involves a higher degree of difficulty and commands a correspondingly higher margin.

Looking ahead, investors should not get carried away by the strong financial performance that MMSV is expected to book in the coming quarters. After all, this upside has been priced in. The lure of this stock after its stellar performance this year lies in the group’s ability to secure more work later this year.

And as far as Sia can see, the semiconductor boom will not wane anytime soon.