We believe the 29.8% YTD plunge in share prices is overdone and grossly priced in the 33% decline in 9MFY18 earnings, mainly due to temporary product mix/sales aberration, forex losses, higher promotional expenses and expiry of the pioneer status. We remain sanguine on MIKROMB’s long term prospects, driven by its product resilience and innovation, hands-on management, strong in-house R&D and expanding geographical footprints. Valuations are undemanding at 13.1x FY17 P/E (12.1x ex net cash of 2.4sen) vs. FBM ACE FY17 P/E of 19.1x. Potential downtrend channel breakout to spur prices to RM0.38- 0.405 levels.

Small but beautiful. MIKROMB was formed during the Asian Financial Crisis in 1997 by two engineers (Wong Yin Wah and Fong See Ni) and businessman, Yim Yuen Wah (collectively owns 44.9% stake) to design and manufacture electrical distribution equipment, such as overcurrent relays, earth fault relays, earth leakage relays, power factor regulator, protective relay and digital meter etc. Together, they envisaged a home grown brand that could compete with global players (such as Schneider, Siemens and ABB) – by offering high quality products at competitive prices and a large portfolio of in-house designed and developed products with long life spans. Today, it has grown to become the market leader in the country, estimated to capture over 50% market share.

Strong testament to its products. MIKROMB’s products are used to monitor and prevent damage to electrical equipment, thereby mitigating breakdowns or interruptions to business operations, widely used in all types of buildings, from shopping malls, hotels and airports to schools, hospitals and industrial plants. Some notable projects include KLCC, KLIA2, KL Eco City, MRT stations in Singapore, Resort World Sentosa, Doha International Airport, Ho Chi Minh Hospital, F1 Circuit Bahrain etc.

Long term prospects remain favourable. MIKROMB recorded superb net profit margins of average 21% from FY05-17, as a result of continuous investment in R&D, tight cost control and a high production automation rate, supported by a strong FY2005-2017 EPS CAGR of 12%. However, the momentum is likely to fizzle off in FY18 as its 9MFY18’s earnings slid 33% to RM5.5m, mainly due to temporary product mix/sales aberration, forex losses, higher promotional expenses and expiry of the pioneer status. Despite the hiccup, we remain sanguine on MIKROMB’s long term prospects, driven by its product resilience and innovation, hands-on management, strong in-house R&D and expanding geographical footprints.

Huge untapped overseas markets. Despite dominating a 50% domestic market share, MIKROMB has been intensifying its efforts to expand overseas markets to about 30 countries (key markets are Vietnam, India, Indonesia, Iran and Bangladesh etc.) to date. To recap, export sales accounted for 44% of revenue or RM22m in FY17, up from 28% or RM7.8m in FY13. We believe there is huge untapped potential for further exports expansion, particularly in the Emerging and Developing Asia as IMF expects this region (including China, India-4 and Asean-5) to maintain its robust growth of 6.5% in 2018–19.

Potential bullish downtrend channel breakout. After correcting 49% from RM0.54 (23 Oct 2017) to RM0.275 (31 May), MIKROMB rebounded 20% to end at RM0.33 yesterday. As the stock is consolidating upwards above the support trendline near RM0.30, it is poised to break above the long term downtrend line soon (near RM0.35). A decisive cross above this hurdle will spur prices higher towards RM0.38 (50% FR) reaching to our LT objective at RM0.405 (61.8% FR). Meanwhile, key supports are located at RM0.32 (30D SMA) and RM0.30. Cut loss at RM0.295.

Source: Hong Leong Investment Bank Research - 17 Aug 2018