Trade Wise: Mikro MSC sets the stage for long-term growth

  • While domestic demand should sustain for another two years, we are growing our export sales to other Asian countries” — Yim
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This article first appeared in Corporate, The Edge Malaysia Weekly, on June 6 - 12, 2016.

MOST consumers have probably never heard of homegrown electrical distribution equipment maker Mikro MSC Bhd, which still occupies the humble shoplot it started out in two decades ago in 1997. But not only have its products found their way abroad to countries such as Vietnam and India, its digital meters, earth leakage relays and power factor regulators are also used in the high-rises, shopping malls and mass rail transport systems being built here.

And just as that single shoplot has multiplied to five shops, the company’s profit and revenue have tripled since its listing in 2005 — they have grown by an average of 15% and 16% a year respectively in the past eight years.

Now, plans are underway for Mikro MSC to capture the expected rise in infrastructure spending in Asia and secure its long-term growth. Last year, the ACE Market-listed company spent RM11.7 million to acquire a vacant factory in Shah Alam, Selangor, which could house a much higher production capacity.

“This is a strategic investment for long-term growth. We are now getting the approvals from the relevant authorities and we estimate that the new factory will be completed and operational by end-2017 or early 2018, which falls in FY2018. But bear in mind that we are not facing any capacity constraints now as we are running one shift with some overtime. If necessary, we can still run two shifts to meet customers’ orders,” says managing director and largest shareholder Yim Yuen Wah.

“At the moment, we are renting five shoplots for our production and warehousing needs, with each shoplot housing a different production station. The new factory will allow us to streamline our manufacturing process and improve our operational efficiency, in addition to having the added capacity. The move will also reduce our operational risk because if the shoplot owners decide not to let [the units] to us, it could disrupt our operations,” he adds.

Yim says the new production plant will also help boost Mikro MSC’s profile as the company can bring foreign and prospective clients on a tour of its manufacturing facilities.

Besides the acquisition of the factory in the second quarter of FY2016, the company also raised RM8.3 million during the same period from placements of shares to a group of foreign and local institutional investors, which allows it to maintain its net cash position. According to mutual funds filings compiled by Bloomberg, UOB Asset Management (M) Bhd, Areca Capital Sdn Bhd and Norway’s sovereign wealth fund Norges Bank Investment Management are among the investors who took up the private placements.

There have been more enquiries from other funds but for now, Yim says the controlling shareholders are not keen on placing out new shares as the company is generating sufficient operating cash flow to expand as well as maintain dividend payments. Moreover, the collective equity interest of the three founding directors — Yim, Fong See Ni and Wong Yin Wah — had already been diluted from 48.4% to 44.9% after the recent share placement.

Going forward, Yim says Mikro MSC is looking to expand its export sales even as it continues to invest in the R&D of new products to serve both the local and overseas markets. In FY2015, export sales were about 37% of total revenue versus 28% in FY2013 and FY2014. In absolute terms, they grew 69%, from RM8.6 million in FY2014 to RM14.5 million last year.

Recounting the company’s genesis, Fong says Yim had the idea of setting up Mikro MSC 20 years ago when he was working as a contractor in the electrical industry. He had figured that a small yet pricey foreign-made electrical distribution component must command good margins and saw a window of opportunity.

“Wondering if Malaysia could manufacture this (the component) instead of importing from overseas, he found me, the engineer, to develop and manufacture the products,” Fong explains.

“After years of R&D as well as trial and error, we have built a strong in-house R&D team that enables our products to match major international brands’ in quality but with competitive pricing. Through our brand-awareness or brand-building exercises these 20 years, we have garnered about 50% of the local market share. For the overseas markets, it’s harder to gauge our market share but we see growing demand in Asia,” he adds.

Mikro MSC products, he continues, are built to last, which is good for the company’s clients and its reputation.

“Our products usually have a long life cycle of about 8 to 10 years and are typically installed in high-rise buildings and infrastructures such as MRT stations. As such, the demand for our products is somewhat correlated to construction activities. For Malaysia, the strong growth in domestic sales in recent years is due to the investment in properties and infrastructure in the prior years,” says Yim.

“While domestic demand should sustain for another two years, we are growing our export sales to other Asian countries. Our sales to Vietnam, our largest export market, have been helped by booming construction activities there.”

In FY2015, Mikro MSC derived 63% of its sales locally with the rest coming from Vietnam (15%), India (4%), Iran (3%) and other countries. However, there is some client concentration risk, as its top four customers accounted for about half of its revenue.

Between FY2011 and FY2015, its revenue grew at a five-year compound annual growth rate of 10.6% to RM39 million, thanks to growing local and overseas sales, particularly to Vietnam (see chart). Net profit increased at a faster rate of 19.4% to RM8.3 million, due to better economies of scale, margin expansion and lower taxation (pioneer status).

When asked if Mikro MSC has been impacted by rising operating costs such as the foreign worker levy hike faced by other manufacturers in the country, Yim replies that all employees of the company are Malaysians, so it is not affected by the hike in minimum wages.

As for the fluctuations in currencies, Fong says although the company is a net beneficiary of a stronger US dollar, the foreign exchange impact on its bottom line is insignificant. This is because the forex gains derived from selling 40% of its products to the export markets are partially offset by the higher import costs of raw materials and semi-finished products, which are denominated in the greenback.

For FY2015, Mikro MSC achieved a high gross profit margin of 51.8%, reflecting the margins of its internally developed products and its leading position in the intelligent electronic devices market in Southeast Asia. Its operating profit margin stood at 26% with a return on equity (ROE) of 24.1%, thanks to tight cost control and a high production automation rate of 70%. By comparison, the operating margin and ROE of the FBM KLCI for 2015 stood at 18.8% and 10.4% respectively.

Compared with its peers that manufacture measurement instruments in other developing countries, Mikro MSC also commands one of the highest margins (see table), although its market value is significantly smaller.

Looking ahead, Fong says machine-to-machine connectivity and the Internet of Things could be the next big things that could disrupt the industry. The company, which benefited as rivals fell away during the shift from analogue to digital devices, is working hard to ensure it stays ahead of the curve.

“While the standards have not been fixed yet, we have developed and built network connectivity into our new series of products,” he says, adding that the performance of some devices can already be monitored on the mobile phone. “Thanks to our strong R&D capability, we are ready to embrace and capitalise on this technological innovation.”