Frankly Speaking: Exercise caution with the ‘Genetec effect’

This article first appeared in The Edge Malaysia Weekly, on September 27, 2021 - October 03, 2021.
Frankly Speaking: Exercise caution with the ‘Genetec effect’
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Last week, shares in Genetec Technology Bhd got a shot in the arm again, surging to a record high of RM40, after CGS-CIMB Research initiated coverage on the company with an “add” call and a target price of RM50.

On a weekly basis, its shares jumped as much as 11% before settling at RM37.94 last Friday. Year to date, it is up 22-fold from a mere RM1.73 as at end-December 2020.

It is worth noting that Genetec employees who took up the employee share option scheme at the exercise price of RM1.37 per share have been well rewarded.

Back to CGS-CIMB’s call on Genetec, it expects the latter to post a three-year earnings per share compound annual growth rate of 235%, arising from more orders from its electric vehicle (EV) customers, more contract wins from existing automotive clients (both EV and non-EV) as well as higher economies of scale.

With the expertise and technical know-how in the EV sector, it noted that Genetec — which makes automated industrial systems, equipment and value-added services for customers in the EV, automotive and hard disk drive segments — is in a good position to continue to win contract awards from its EV customers, which could include Tesla Inc.

As technology firms usually are not inclined to disclose the identity of their customers on competition concerns, it is hard to confirm whether Tesla or other EV makers are, or will be, part of its customer base.

Moreover, it seems the expectation of Genetec bagging contracts from Tesla — considering the strength of the former — is purely speculation at the moment.

So, is the market overexcited about it? While the EV/battery segment did contribute the bulk (92.6%, or RM189.4 million) of its orders of RM204.6 million secured in the first half of this year, it remains to be seen how the upcoming contract flow will be.

In the latest quarterly results for the financial year ended June 30, 2021, Genetec posted a net profit of RM8.18 million, after making a widened net loss of RM4.25 million for the financial year ended March 31, 2021, against RM166,000 a year ago.

The rally in Genetec has also sparked investor interest in other technology stocks in search of similar high returns. Technology-related companies such as Widetech (Malaysia) Bhd, Kumpulan H&L High-Tech Bhd and PMB Technology Bhd are among those that have come under the radar screen of investors recently.

One thing that these stocks have in common is that they are trading on thin volume, which could, in turn, lead to heightened volatility — something investors should be mindful of.

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