Growth and Value Investing
Kronologi Asia Bhd: A recovery play
growthvalueinvesting
Publish date: Tue, 27 Sep 2016, 11:43 AM
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We cover a range of different sectors and we are not restricted to one single investment style (although we strongly advocate the growth and value investing style).
Our investing time horizon also varies from stocks that we want to hold for a few months to companies that we want to hold forever.
We cover a range of different sectors and we are not restricted to one single investment style (although we strongly advocate the growth and value investing style).
Our investing time horizon also varies from stocks that we want to hold for a few months to companies that we want to hold forever.
Kronologi Asia Bhd
Market Cap (26/9/16): RM63.9mil (RM0.27/share)
PER:20.93 (TTM)
Div. Yield: Nil
Net Gearing: Net Cash
We initiate coverage on Kronologi Asia Bhd as we believe the company will undergo a strong recovery in FY16 and the market has not yet seen or priced in this recovery.
Company Background
Kronologi Asia Bhd is a provider of Enterprise Data Management (EDM) solutions. They sell on-site data storage equipment and also provide off-site cloud services to their target customers of mid to large size corporations. Krono has a presence in 5 countries across South East Asia namely Malaysia, Singapore, Thailand, Indonesia, Philipines and it just announced an acquisition that would expand its market presence to India. Its main markets are Singapore (64% of revenue), Philipines (8%) and Malaysia (7%). Among its major customers are Starhub in Singapore, Public Bank in Malaysia and Pertamina in Indonesia.
Source: www.channeltimes.com, Quantum
The story so far
Kronologi Asia Bhd listed on the ACE market at the end of 2014. They have been in the business of selling on-site data storage equipment since 2002 but had little experience in cloud services. However, identifying that the world was moving towards both on and offsite storage services, they decided to expand and start selling cloud services. They got listed by selling the story of expanding their recurring revenue through selling their subscription based cloud services as well as further expansion into new ASEAN markets such as Myanmar and Vietnam.
However, this story failed to materialise as immediately in the first 2 quarters of 2015, the company went into losses. The losses were mainly due to companies cutting heavily on CAPEX because 2015 saw a major slowdown in some of their main markets and this had a major effect on high value IT CAPEX spending. As a result, while revenue still grew 12%, profits plunge by 50% due to compressed GP margin due to poorer sales mix caused by selling lower value replacement-type products.
Major shareholder and then CEO of the company, Mr Piti Pramotedham resigned from the board after that. Exact details of what happened are lacking but an EGM was called in August of 2015 by Mr Piti to replace the existing board of directors. This move did not materialise and Mr Piti eventually resigned citing health reasons with then CTO, Mr. Phillip Teo Chong Meng (pioneer employee of Krono) replacing him. The board has roughly remained the same with the exception of the appointment of Mr Geoffrey Ng (currently Director at Fortress Capital Asset Management and former CEO of Hong Leong Asset Management).
Mr Piti still owns the majority of shares in the company at 53% but his stake will eventually be diluted to 43% upon the completion of the India acquisition (which will be discussed below).
In 2HFY15, after 2 straight quarters of losses, earnings recovered and Krono has posted a positive bottomline for the past 4 quarters. Q1FY16 results were encouraging with profits of RM1.4mil vs Q1FY15 losses of RM1.1mil. In addition, Krono has announced expansion plans going forward with their acquisition of their India associate company.
Competitive advantages
Kronologi has the exclusive rights to sell the 'Quantum' brand of on-site data storage equipment. Quantum is a manufacturer of data storage equipment listed on the NYSE. These equipment include large sold state disc drives and flash arrays that are used to back up data on a huge scale. In addition, Krono also offers off-site data managed services which is equivalent to cloud services.
The on-site data storage equipment business has a decent barrier to entry due to the fact that the business is a global oligopoly with a few major players.
Only few major players in the world have spent millions in R&D in order to build the technology and the strong brand name. These are names such as IBM, EMC, Oracle, HP and Quantum. Its very difficult for any new player to build new technology as the R&D costs will run into millions if not billions. Its also very difficult for any new player to build a brand the likes of IBM and EMC have done. However, checks on IDC's recent market share releases has shown that Quantum is not among the Top 5 players around the globe. The Top 5 spots are dominated by EMC, IBM, Dell and HP.
For their on-site data storage equipment, while Quantum is not in the Top 5 companies that sell data storage equipment worldwide, we believe they have pricing and quality that is competitive due to the fact that the likes of Starhub and Public Bank are their customers. They sell through a network of distributors that include the likes of Ingram Micro and ECS Computers in Singapore (Ingram Micro is the world's largest distributor of ICT equipment. These two players are top 2 in Malaysia and we think they are top few in Singapore as well.) However, Krono maintains immediate contact with major end customers. This is to ensure they provide reliable after-sales technical service and the direct access will enhance their chances of recurring orders for replacements/upgrades of old equipment and new purchases when the customer expands.
For their off-site cloud services, their competitive edge lies in the fact that they already provide on-site data storage equipment to existing customers. This would allow them to cross sell their cloud services to these existing customers. Their customers would prefer dealing with just one party instead of dealing with two different parties to save the hassle.
Market outlook
Their immediate growth prospects lie in their recovery and stabilisation of earnings as well as the recently announced acquisition of their associate company in India.
Krono's recovery looks to be on track with recent 1HFY16 revenue growing 39% y-o-y while profits returned to the black at RM3.1mil from RM2mil in losses last year.
In relation to the acquisition, on 22nd July 2016, Krono announced an acquisition of their 20% owned India associate company - Quantum Storage India (QSI). The associate company is also involved in the business and selling 'Quantum' data storage equipment to the Indian market. They intend to pay RM 26mil which values the company at 6.5x PE based on a profit guarantee of USD1mil for FY16 (RM4mil based on 1USD:4MYR). The profit guarantee will be for 2 years for FY16 and FY17. We think the valuation is fairly cheap as it is a discount to the 12x PE valuation Krono got when it was listed.
The RM26mil will be paid with RM 15.2mil in cash and RM10.8mil in shares. This will require an issue of 55.6mil new shares (23.4% of existing share base). Nevertheless, the acquisition is earnings accretive (EPS will increase after share dilution due to profit guarantee). Assuming no core operations profit growth in FY16 from FY15, an addition of RM 4mil (1mil USD profit warranty) would boost EPS from FY15 1.29c to FY16 2.42c. The EGM was held on the 26/9/2016 and the acquisition was approved by the shareholders.
The other significant thing of note is that upon acquisition, the current owner of QSI, a certain Mr Tay Nam Hiong would own 20% of Krono with the majority shareholder, Mr Piti's stake being diluted down to 43%.
In terms of Krono's medium term growth prospects, it continues to lie in their ability to expand in the off-site cloud services segment and building/expanding in other ASEAN countries who will require more and more data storage services in the future.
Key Risks
Declining prospects of on-site data storage market
The worldwide on-site data storage market is declining in favour of off-site cloud services. However, Krono's target market of mid to large corporations still need to have multiple data backup systems for added security and protection.They would not shun the traditional on-site data backup equipment in favour of cloud services like the ordinary retail customer has done. Instead, they would utilise a mixture of both these services in order to enhance data security and protection.
There is the risk that the major shareholder might not support future decisions by the company due to the circumstances of his resignation. However, in the recent EGM, the company received 100% support from shareholders owning 60.5% of the total shares, with no shareholders voting against the acquisition. Given that the major shareholder owns 53% of the company, the major shareholder must have voted in favour of the acquisition. We view this move positively as it shows that the major shareholder will not stand in the way of any positive developments for the company.
In addition, the approved acquisition will see the major shareholder's stake diluted from 53% to 43%.
Loss of principal
There might be a termination of relationship between Quantum and Kronologi. However, this is unlikely as Krono has been their seller for >10 years. In addition, Quantum is currently facing problems on its own as it is making losses and is in the midst of executing a turnaround plan to bring it back to profitability.
Prolonged or sudden economic downturn
A sudden economic crash will result in a repeat of last year where companies cut CAPEX and Krono went into losses. A prolonged economic downturn will have the same result.
Valuation
Kronologi 1HFY16 net profit was RM 3.07mil, going forward if the company can maintain that performance, annualised FY16 profits will be RM6.14mil. Including profit guarantee of RM4mil (based on 1USD:4MYR), FY16 profits will equal RM10.14mil (up 232% from FY15 profits of RM3.05mil). Assuming full dilution from issue of shares, share base will expand to 292.629mil shares. Fully diluted FY16 EPS will be RM0.035c/share.
Based on this EPS, some possible valuations are:
Current Price (26/9/2016): RM0.27
8x PE (Annualised PE pre-announcement of acquisition): RM0.28 (13% upside)
10x PE: RM0.35 (41% upside)
12x PE (IPO valuation): RM0.42 (69% upside)
Conclusion
We believe in Krono because we thought the market had significantly undervalued it if one considered the earnings growth it would experience compared to FY15. We continue to believe in the shorter term recovery play even more so now because of the India acquisition.
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For full disclosure, the writer of this article owns 14,700 shares in Kronologi Asia Bhd. The article is used to inform the general public about stocks/companies and is not a recommendation to buy or sell. Your choice to buy or sell is your own. Do so at your own risk.
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Discussions
2 people like this. Showing 6 of 6 comments
Thanks for the blog. I have read through the 2015 AR and done some quarterly report analysis. Based on this servicing and selling instrument industry, the GP is very much dependent on what machines it sold. Thus, profit could be fluctuating as seen in 2015. The recurring income still not strong as seen in managed services. Not much information found in the cloud services they aiming. I totally agree that buying the remaining of QSI will boast the bottomline. If based on shares of associates from latest 2Q16 report. QSI can contribute more than RM1 mil per quarter. Again, this still depends on what project they get. Based on acting CEO, they will get a few big project in India.I hope it can be reflected in 4Q16 report as the acquisition only done at end of Sept (end of Q3, so doesn't expect much)
Few questions hope to get some answer
1)Other than India, which countries they are aiming to expand?
2)Which industries they aiming to focus on? What is Krono strength compared to competitior?
3) Which area Krono plan to focus to increase recurring income and any update?
4) For the cloud service, which industry or companies are interested in subscribing? Any revenue generated thus far?
One of the local companies provide similar cloud service is exabytes.
I have no doubt that Krono will shoot above RM0.3 based on fundamental and TA. However, whther it will pass through the listing price, the sustainability is critical.
2016-09-28 12:25
Hi Thanks growthvalueinvesting. Itry to call their office but unable to get through. No email contact as well
2016-09-29 17:03
Feel free to comment and ask questions. I will readily answer them. Thanks.
2016-10-04 21:16
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