Mikro MSC Bhd
ELECTRICAL and electronics (E&E) is a major industry in Malaysia, contributing 24.5% to the manufacturing sector in terms of GDP. However, when it comes to investing, there are very few appealing choices in the sector.

One small cap niche player that is relatively unknown is Mikro MSC Bhd, which has consistently high margins and a net cash balance sheet. The company’s market capitalisation is relatively small at RM 75.2 million, but a recently proposed 1-for-2 bonus issue should improve liquidity.

Established in 1997, Mikro MSC is involved in the production of electrical distribution products such as overcurrent and earth fault relays, metering solutions and power factor regulators. Its products are an important component of a building’s integrated electrical system. They monitor and prevent damage to electrical equipment by isolating and tripping a circuit breaker when an electrical fault is detected.

Between FY June 2010 and 2014, the company has seen sales growing from RM20 million to RM28 million, while net profit increased from RM3.7 million to RM4.6 million.  It boasts consistently high double digit net profit margins ranging from 14% to 18% from FY2011 to FY2013.

Some 72% of Mikro’s revenue are from domestic sales and the rest from exports. However, there is also some client concentration risk as about 46% of sales are from four major customers.

Among its peers, Mikro’s 19% return on equity is one of the highest return. It has net cash of RM3.4 million or 1.8 sen per share as of end FY2014, with a respectable dividend yield of 3.7%.

It comes as no surprise that Mikro trades at a slight premium valuation, at 2.4 times book with a trailing 12-month P/E of 13.5 times. Positively, these premium valuations should decline over time, as the company’s earnings are growing fast, as reflected by its P/E-to-growth ratio of just 0.7 times.

This article first appeared in The Edge Financial Daily, on November 5, 2014.