Introduction

Elsoft Research Bhd (“ELSOFT“) is in the business of research, design and development of test and burn-in systems and application for semiconductors. In simple terms, ELSOFT is in the business of designing and producing automated test equipment (“ATE“) to test a semiconductor-based product.

Business segments

The growth engine of ELSOFT lies in two major segments: automotive and smartphone segments.

In the automotive segment, ELSOFT develops ATE which tests daylight running lights, LED headlamps and rear-end signature lighting for branded cars.

In the smartphone segment, ELSOFT develops ATE which tests the LED component of a smartphone.

Financials

I have designed a basis template of ELSOFT’s financials from FY2011 to FY2016.

Note: * FY2016 is unaudited

From my calculations, the compounded growth rate of the company, between FY2011 to FY2016, is a whopping 36%. Notably, ELSOFT’s profit margin is strong, between a range of 40-50%. This indicates that the company is not in a price competitive industry and/or its products have a competitive edge over similar products in the market.

ELSOFT’s customer base is from Malaysia (~90%), China (~7.8%) and Taiwan (~2.25%).

The automotive segment contributes close to 50% of ELSOFT’s revenue whilst the smartphone segment contributes a respectable 37%. General lighting contributes 13%.

Potentials

Through its R&D, ELSOFT has developed two new products:

1. next generation test and burn-in solution for the automotive and general lighting segments; and
2. ATE for solar cells.

This would be, I believe, ELSOFT’s first foray into the solar cell segment.

ELSOFT intends to enter into the medical devices market to develop control boards or embedded control systems for kidney dialysis machines. This will start as soon as ELSOFT obtains an European quality certification for medical devices.

For the 1st half of FY2017 (until 31 March 2017), it has a book order of RM27 million already. To the contrary, book order for the 1st half of FY2016 was RM21.5 million and a full year’s (FY2016) book order stood at RM49 million.

Conclusion

I like ELSOFT for the following reasons:

1. High profit margin.
2. Strong growth rate.
3. Strong R&D.
4. Low debts.
5. Strong cash flow.
6. Anticipated growth in the semiconductor industry in FY2017.
7. 40% dividend payout policy.
8. There are still value in its shares despite a 1-year increase of 71%.

I dislike ELSOFT for:

1. Reliance on R&D.
2. 90% of its customer base is in Malaysia.

Disclose

I have already own shares in ELSOFT and will continue to acquire more of ELSOFT’s shares.

https://bursagoinglong.wordpress.com/2017/04/09/analysis-of-elsoft-research-bhd/