Posted by kcchongnz > Jun 17, 2013 09:57 AM

Is Willowglen MSC a good company? Is it a good investment? 

First I look at the business of the company if there is economic moat. Two important attributes of economic moat is the durability and the quality of the business. A durable business is whether the business is a good one and will still persist many years in the future. High quality business has good cash flows, high margins compared to its competitors and provide excess returns to its capital providers. 

Willowglen MSC Berhad is engaged in the research, development and supply of computer-based control systems. Its supervisory control and data acquisition (SCADA) system is used in security monitoring, building management and environmental control systems that has been showing promising growth trends in recent years. Its operations are mainly carried out in Malaysia and Singapore with the Indonesian market in the developing stage. In the Klang Valley, there are some key areas that will lead to the increase in the demand for SCADA and Security Systems applications, such as the High Speed Rail System, MY Rapit Transit andSewerage Non-River. In Singapore, there will also be more business opportunities in line with the Government’s initiative in construction of new infrastructure, facilities for transportation and utilities such as power, water and sewerage plants. This will directly or indirectly provide opportunities for growth and demand for SCADA and Security Systems. This shows the durability of Willow’s business which will continue to exist and prosper for years to come. 

From the past years from 2005 to 2012, revenue and net profit of the company was quite flattish at an average of 50m and 8.5m respectively. However the last financial year saw revenue and net profit jumped by 60% and 80% to 83.4m and 15.4m respectively. This good performance continues in the first quarter of 2013. For the past 5 years, cash flows from operations has been about the same as net income and free cash flows abundant at 89% and 34% of revenue and invested capital. This is despite that they were pulled down by the poorer CFFO and FCF last year as a result of its 60% increase in revenue. The net profit margin of Willow has been quite consistent at an average of 18% (>15%) which is pretty good to me. This is also shown in the high ROE and ROIC of 18% and 37% respectively. All these demonstrate that the quality of the business is great. 

The Board of directors is strangely just made up by one executive director who is the Managing Director, Puan Sri Khor Chai Moi, age 60, and an accountant by training. There are 4 independent directors. The business appears to be fully controlled by the major shareholder. The composition of the Board is very lean indeed. Total management compensation for last year was only RM512000, or about 0.6% (>>3%). Anyway, the major shareholder Puan Sri Khor and her family hold 52% of the shares and hence the interest of shareholders and management appears to be aligned. 

So taking all these into considerations, I would rate Willow as another above average company. What how about its price? We have discussed before that a good company may not be a good investment if it is very pricey. 

At the price of 48 sen now, Willow is trading at a PE ratio of just 7.7 (<20). Market Enterprise Value is only 4.6 times EBIT (<8). Price-to-book is only at 1.6 (<2). I would say a good company of Willow is selling very cheaply.