· Another interesting tech stock to watch. Hot on the heels of automated test and vision inspection equipment manufacturer, Vitrox Corporation Bhd (TB, TP: RM3.84), that was highlighted in our corporate event and subsequently as an OR product during the 1Q15 which drew some buying interest (up by 25% since then), we introduce yet another under-covered tech stock, which is also a similar industry, namely MMS Ventures Bhd (MMSV). MMSV, which is also based in Penang, is involved in the design and manufacturing of automation solutions for the LED and Semiconductor industries. Differentiating itself from the standard test and vision inspection equipment manufacturers, MMSV focuses on LED test and vision inspection solutions that are specifically tailored to meet customers’ various requirements (at least 50% of the LED test and vision inspection equipment in the market required customised equipments). Most of its customers are world-leading LED makers, with the top ten contributing c.80% to its total revenue.

· Healthy LEDs demand and equipment spending to spur MMSV’s earnings outlook. The implementations of new energy standards in several major countries (which have restricted the usage of incandescent lighting) are spurring greater demand for LED lightings. According to LEDinside, the LED lighting market value is anticipated to grow at a 4-year CAGR of 18% through 2018. We see such positive trend to bode well for MMSV as nearly 90% of the group’s products are catered for LED applications. Meanwhile, looking from the perspective of semiconductor equipment manufacturing, worldwide semiconductor equipment sales are expected to register a decent growth of 15% in 2015 by SEMI, alongside the healthy global semiconductor sales forecasts (of mid-high single digit growth) by both SIA and WSTS, even from a high base in 2014. The growth will be mainly underpinned by the surging demand in Smartphones and Automotive in end applications. As 60% of MMSV’s total revenue is exposed to the LED of Smartphones and Automotive segments by end applications, we believe the group which is positioned in the front-end of semiconductor value chain, is in the sweet spot to ride on the surging wave of these rising trends. Our positive view is also further reaffirmed by the management’s confidence in achieving 20% growth in its FY15E revenue, even from a high base in FY14 (+50%). We gather that the growth should be underpinned by surging demand of test systems and machines in Smartphones/Devices segment, which commands fatter margins.

· Strong balance sheet and healthy cash flow to support its dividend payout in FY2015. The group is at a zero gearing position with strong net cash of RM15.7m as of Dec 2014. Although no dividend was declared since FY08 until the recent FY14 (total 2.0sens single-tier dividends were declared, representing c.31% of payout ratio), we believe that the group could offer up to 3.0 sen (based on a DPR of c.38%), translating into a dividend yield of 3.8%, based on its FY15E free cash flow projection of RM10.5m.

· Benefiting from strong USD vs MYR trend. MMSV is also the net beneficiary from the appreciating USD, as 70% of its revenue is quoted in USD with natural hedging from its raw materials purchases (at c.20% of total costs). Based on its FY14 annual report, every 5pct of appreciation USD vs MYR would translate into RM0.378m increase in its FY14 NP (or +3.6%). Having said that, any unfavourable fluctuations would also equally corrode the group’s profitability.

· Trading Buy with a Fair Value of RM0.95. All in, we are projecting the group to register FY15 NP of RM12.8m based on: (i) revenue growth of 20% mainly driven by higher volume machines sold in Smartphone segment (in line with management’s target), and (ii) EBITDA margin of 28.0% (+0.3ppts) for better product mix. By ascribing a targeted PER of 12x (which is at a 20% discount to the targeted PER of 15x that we ascribed to VITROX) on our forecasted EPS of 7.9 sen, the indicative FV is RM0.95, which could offer 23.3% upside potential on top of a net yield of 3.8%.

Source: Kenanga Research - 12 May 2015