GEORGE TOWN: Automated test equipment (ATE) solutions provider Elsoft Research Bhd’s catalyst for growth over the next two years begins with its long-term strategy of penetrating new segments and introducing two products this year.

Chief executive officer Tan Cheik Eaik said that the time has come for Elsoft to expand its conventional business by developing new products through ongoing research and development (R&D).

“They comprise the next generation test and burn-in solution featuring a high-speed light emitting diode (LED) tile tester for the automotive and general lighting segments, and ATE for solar cells that will begin production in the second quarter of 2017,” he told The Edge Financial Daily.

The ATE total solution for solar cells would be manufactured for a US-based and Taiwanese joint-venture company in Malaysia.

Tan said the group has secured one customer each for the products in its test and burn-in solutions segment, and strongly believes that there would be more clients in the second half of 2017 (2H17).

“We plan to ramp up marketing for the high-speed LED tile tester among existing customers, and new ones in Malaysia, China and Taiwan. We see a good prospect as the performance is 10 times better than others in the market and the price is competitive. We see growth as volume is coming in from our existing customers and revenue would trickle in 2H17,” he said.

Tan said Elsoft’s plan to enter the medical devices segment — where it develops control boards or embedded control systems for kidney dialysis machines — is expected to start soon. The group is in the midst of obtaining the European quality certification for medical devices.

“Three years ago, we wanted to explore a new segment by using our core competency to build a product in view of diversification from the automotive and smart devices segments, and it has taken us that long to break into the medical devices field, [but] I see this industry as being so good.

“I just did not think that the development and qualification phase would take us so long though we were determined. We used our profit and revenue to subsidise the R&D. Last year, we spent 12% of our revenue on R&D,” he said.

Tan said Elsoft had an order book of RM27 million as at the first quarter of the year ended March 31, 2017 (1QFY17). It comprises orders for traditional ATE LED test equipment, and burn-in system business units catering to smart devices, automotive and general LED lighting.

In comparison, the order book for 1QFY16 stood at RM21.5 million with the full year’s orders amounting to RM49 million.

Elsoft (from the words “electronic” and “software”) used to manufacture keyboard emulators, optical mouses and camera module testers. It now develops LED total test solution (tester and automation) automotive tail lighting and daytime running lights, and smart devices such as smart phones’ LED flash.

Elsoft’s FY16 net profit grew 19.7% to RM31.2 million, from RM26.04 million in FY15. Revenue rose 28% to RM63.6 million from RM49.7 million. From FY11 to FY15, its net profit compound annual growth rate was 39.46%.

“Globally, the LED automotive market is seeing explosive growth that is reflective in our profit. General lighting’s profit is small, but we also see that growing well.

“However, we hope that the solar cell and medical devices will take us further in years to come. We want to test the market before penetrating further for higher volume and prospect for other equipment,” Tan said.

According to its market segment analysis, the automotive segment contributed 49% of its revenue, followed by smart devices (37%), general lighting (13%) and others (1%).

The group has a minimum 40% dividend policy, but has progressively raised its payout to up to 70% in the past five years. It also paid a special dividend of two sen in FY16.

Kenanga Research recently maintained its “trading “buy” rating on Elsoft with a higher fair value of RM1.90 after visiting the company.

Kenanga was convinced of Elsoft’s brighter prospects in FY17 based on its ATE orders from solar cell players and its “resilient lion’s share orders” from the automotive and smart devices segments.

Elsoft’s share price, which has been on an uptrend in recent months, rose 10 sen or 5.4% last Friday to close at RM1.95, giving it a market capitalisation of RM356 million.

“The overall equipment industries outlook is good, driven by the automotive and smart devices sectors, model launches and a favourable ringgit,” Tan said of the stock’s performance.