ARB Berhad (“ARB”) was incorporated in October 1997, and listed on the Main Board of Bursa Malaysia in February 2004. The Group started off as a supplier of timber products and provision of tug boat transport services.

In December 2019, the Group ventured into providing Enterprise Resource Planning (“ERP”) and Internet of Things (“IoT”) solutions to business clients. In FY2020, the Group recorded a historic high of RM219m in revenue and RM42.6m in net profit.

This article analyzes ARB’s business, significant project wins, and financial performance since venturing into ERP and IoT. We also provide our views on whether ARB is a target worth consideration.

Since ARB completed the sale of its loss-making timber business in June 2020, the Group’s principal activities have since been on ERP and IoT only. Below is a brief description of ARB’s role at the provision of ERP and IoT solutions:

Enterprise Resource Planning (“ERP”) solutions

• Design and development of cloud customized ERP solutions i.e. system dashboards and platforms;
• Advice and provide assistance with the integration of businesses’ existing ERP system into the cloud to streamline core business processes; and
• Provision of supports, troubleshooting, and implementation to the cloud.

Internet of Things (“IoT”) services

• Engineering, procurement, commissioning, and management of IoT system for property developer and contractor;
• Full turnkey deployment from designing, installation, testing, pre-commissioning, and commissioning of various IoT systems and devices;
• Integration of automated systems for smart building, including installation of wire and wireless and mechatronic works;
• Design smart home solutions which can integrate a range of electrical appliances, centralized control, and remote monitoring, accessible via mobile devices; and
• Provision of software & hardware, data management, and analytics tools.

No further information on their actual work done / successful projects were disclosed on ARB’s website or annual report.

MANAGEMENT TEAM

Prior to 2018, the Group was headed by Datuk Yeo Wan Seng, aged 72 who co-founded the Group back in the 1990s. Datuk Yeo’s experience has always been with the timber industry for the past 40 years.

Over the years, Datuk Yeo was assisted by his son, Yeo Gee Kuan, aged 46 who joined the Group in 2001. Similarly, Mr. Yeo’s experience was mainly in the timber business covering manufacturing to export trading.

In 2018, the Group appointed Dato’ Sri Liew Kok Leong, aged 49 to head the Group’s new venture into ERP and IoT solutions. Dato’ Sri Liew graduated with a Degree in Electronic & Electrical Engineering and a Master of Science in Communication Systems has more than 20 years of experience in Information Technology, manufacturing, telecommunication, property development, and venture capital investment.

Dato’ Sri Liew also holds the position of the Executive Director with Ageson Berhad (“Ageson”), a property developer cum contractor listed on Bursa with a market capitalization of RM150m. Dato’ Sri Liew joined Ageson in June 2019.

In July 2020, Datuk Yeo and his son resigned abruptly citing “other personal commitment which requires his full attention”. Post his resignation, Dato’ Sri Liew was redesignated as the Group Executive Director along with Datuk Baharon bin Talib, aged 70. Datuk Baharon was the Group Chairman during the stint of Datuk Yeo.

No further information regarding the profile of other key management personnel was disclosed by the management.

SIGNIFICANT CONTRACTS SECURED TO-DATE

• Jan 2019 – RM20m ERP Solution – Yes’s Comm. Enterprise Sdn Bhd (“YESS”)
  
  Estimated gross merchandised value (“GMV”) of RM20m. The contract is valid on a yearly recurring basis.
  
  ARB to provide a marketplace platform to YESS to sell and market their products efficiently by implementing a customized ERP System and System Integration Solution (“SIS”). The SIS features include real-time sales tracking, real-time sales and inventory sales interlinking, inventory management, assortment selection and forecast, warehousing, and logistic optimization.
  
  Based on checks, we understand that YESS markets and distributes electronic products via several outlets in Klang Valley.
  
  Author’s remark: A price tag of RM20m for the deployment of an ERP solution seems absurd. No details were shared on what does it mean by RM20m GMV. How much revenue is ARB expected to recognize from the project? What is the quantum of expected yearly recurring income? The lack of disclosure raises our concerns on the management trustworthiness and genuineness of the contract. To date, no information was shared by the management on the progress of the project.

• Mar 2019 – RM78m IoT Solution (Smart Home) – Perkasa Selalu Sdn Bhd (“PSSB”)
  
  The total contract sum of RM78m comprises IoT works, RM27.3m (35%), and outsourced construction works, RM50.7m (65%). ARB assists with identifying and outsourcing construction work to third party/(ies).
  
  The contract involves the development of a single tower serviced apartment comprising 39 commercial and 286 residential units.
  
  Based on disclosures, PSSB incorporated in Perak in 2014 has a paid-up capital of RM2 only. The directors are Chin Kok Hoong and Chin Kok Foong.
  
  Author’s remark: Like above, RM27.3m for implementation of IoT solution for 325 units seem overly inflated at about RM84k per unit. Even so when compared to the estimated construction cost of ~RM170k per unit. Furthermore, PSSB’s director, Chin Kok Foong is believed to be Dato’ Sri Chin Kok Foong. Dato’ Sri Chin has personal ties with Dato’ Sri Liew as they both are the current executive director of Ageson. Similarly, no information was shared by the management on the progress of the project to date.

• May 2019 – RM18m IoT project (Smart Home) – IJ Ventures Sdn Bhd
  
  The total contract sum of RM18m comprises IoT works, RM6.3m (35%) and outsourced construction works, RM11.7m (65%). The contract involves the construction and deployment of IoT for 130 units single-storey terrace houses in Perak.
  
  Based on checks, IJ Ventures is a company involved in construction works, building contractors, and property development.
  
  Author’s remark: RM6.3 million for the deployment of IoT for 130 houses would be equivalent to RM48.4k per house. The amount seems overstated. If IJ Ventures themselves are building contractors, why would they need to appoint ARB to outsource a portion of construction works when they have their own expertise/network? Similarly, no information was shared by the management on the progress of the project to date.

• Jul 2019 – RM600m IoT project (Smart water filtration system) – Shuifa IoT Tech Co., Ltd
  
  The project involves the application of IoT-enabled hardware and software to the printed circuit board of household water filtration system to enable data exchange and remote control of water temperature etc.
  
  The project value of RM600m was arrived at on the estimation of 300,000 households. Tenure is 2 years for implementing the first phase (300,000 households) of the project. No further disclosures were made on the project location and project progress etc to date.

RECORD PROFITS WITHOUT CASH INFLOW

Throughout 2016 – 2018, ARB’s revenue declined steeply with a drop of more than 60% from RM35m to RM15.3m. The Group barely made profits during the period.

Since the Group ventured into ERP and IoT in December 2018, the Group recorded significant improvements on both top and bottom lines in the following years. Within 2 short years, the Group’s revenue and net profit jumped by 17x and 11x respectively.

In the latest quarter i.e. 4Q2020, the Group recorded an all-time high revenue and profit of RM72.5m and RM19.7m respectively.

However, despite the strong profits recorded in FY2019 and FY2020, the Group’s cash flow reflected otherwise. For both years, the Group recorded a total cash flow deficit from operations of RM7m. Further, cash outflow from investing activities for both years totaled RM63.6m.

Out of the RM63.6m, RM41.3m was to acquire property, plant and equipment and RM22.3m for the acquisition of other investments. FY2019 annual report shows that RM15.4m was to acquire computer software and RM5.5m to acquire 51% stake in a company name, C&M Renewable Energy Technology Sdn Bhd.

To fund its operation and investment activities, the Group has been relying on funds raised via issuance of irredeemable convertible preference shares (“ICPS”) and issuance of share capital via conversion of ICPS. In 2019 and 2020, ARB raised a total of RM83.3m.

IRREDEEMABLE CONVERTIBLE PREFERENCE SHARES (“ICPS”) 

As its name suggests, investors with ARB’s ICPS holds a right to convert its ICPS into ordinary share of the company at a conversion ratio of 1 : 1.  

In the case of ARB, the ICPS was initially issued at a fixed price of RM0.01 per ICPS and conversion price of RM0.20 for 1 new ARB share. ARB’s ICPS is currently valued at RM0.175 per share, as compared to ARB’s mother share price of RM0.355 per share. ARB’s ICPS matures in January 2024. 

Based on ARB’s 2020 annual report, the largest holder of ARB’s ICPS is Dato’ Liew himself with 50.8%.

The Group’s financial position seems healthy on its surface, with net cash of RM26.5m. However, we had like to point out several anomalies with its financials, as follows:

• Abnormal increase in non-current assets (“NCA”) in FY2020.
  
  Within a short span of 3 years, ARB’s NCA has increased by more than 10x from RM11.7m to RM145.5m. Based on the breakdown, we note that the increase was due to trade receivables, intangible assets, and other investments which have increased by RM64.1m, RM30.7m, and RM10.8m respectively.
  
  
  
  With no information disclosed regarding these items, concern to investors would be whether these assets are of actual value/recoverability and accurately recognized by the management.
  
  Capitalising these figures may result in under-recognition of expenses. In the event, auditor disagrees with the treatment of these assets, direct impairment would impact the Group’s bottom line by >RM100m.
• Unusual credit term and a significant increase in trade receivables.
  
  As of 31 December 2020, ARB’s trade receivable was RM132.4m, comprised of RM68.2m classified under current assets and RM64.1m classified under non-current assets.
  
  Trade receivable days increased from 160 days to 220 days. No explanations were provided by the Management on the concerning trade receivables.
  
  
• Significant increase in trade and other payables.
  
  Trade payables increased from RM0.2m in FY2019 to RM48.5m in FY2020 and other payables increase from RM0.6m in FY2019 to RM10.6m in FY2020. No details were provided on the breakdown or reason/(s) for the increase.

KEY RISKS FOR CONSIDERATION

• New business venture. The Group’s venture into providing ERP and IoT services was quite recent, back in December 2019. Despite the several large contract wins and record-high profits recorded, the management remains confidential when sharing details and updates for any of the projects. This disallows investors to comprehensively understand the company’s business model, products, and services.
• Relatively new management team helmed by Dato’ Sri Liew who has been with the Group for less than 3 years. Despite his title and experience across the various industries over the past 20 years, we lack information on his track record in the industry. Further concern as Dato’ Sri Liew shares his time as the executive director at Ageson Berhad. Where would his time be focused on?
• Contracts secured so far seem doubtful on the surface. More information and disclosure from the management is required.
• Concerning cash flow position with the increasing trade receivables and heavy investments made in recent years. More information and disclosure from the management is required.
• Further conversion of ICPS to ordinary shares would dilute the Group’s share base. At the cost of minority shareholders, Dato’ Sri Liew himself as the largest ICPS holder would benefit as his stake will increase as he makes more conversions. The conversion cost to Dato’ Sri Liew is probably only RM0.21 per share, compared to ARB’s current share price of RM0.355.
• Lack of transparency and engagement from the management with the investment community. Several queries were sent to the management, but no reply to date.

MAJOR SHAREHOLDERS AS AT 18 February 2021

Out of the Top 30 shareholders, several of the largest shareholders include Dato’ Liew Kok Leong (12.4%), Lim Loi Heng (2.2%), Chan Tiang Seng (1.3%), Au Yee Boon (1.1%) and Shin Kong Kew (0.85%).

Top 30 largest ICPS holders are Dato’ Sri Liew Kok Leong (50.8%), Au Yee Boon (4.7%), Lim Jit Hai (2.2%), Lim Lee Foon (1.6%), and Ng Tee Yew (1.4%).

In June 2020, we note that a US-based fund manager, Caravan Capital Management LLC acquired a total of 3.1m shares in ARB.

PEERS COMPARISON

There are no listed peers who are comparable in terms of business model, products and services to ARB.

HOW MUCH IS ARB WORTH?

For the lack of information and key risks mentioned above, we would not attempt valuing the company unless our concern on the risks is addressed.

Our advice to all investors would be the same. Never invest in something you don’t understand.