Poor cost-control in one of process equipment division’s project -“Sabah Ammonia Urea (“SAMUR”) project”- appears to account for the weak performance in the overall company. Since then, executive directors who are responsible for the poor management had resigned which consequently resulted in a much better quarter.

Organic growth in lighting and transformer sector is hindered by the division of process equipment (losing money) and you can see it from the figure below. Compounded annual growth return (CAGR) of sales is  ~9%. So obviously sales is growing almost annually without much capital expenditure(CAPEX) and leverage. CAPEX is declining in a steady pace from ~40m in 2011 to ~10m in 2017. And that 40m CAPEX in 2011 is mostly used for land and buildings which is not likely to recur due to the nature of business.

Note: T/L= Lighting and transformer manufacturer; PEM= Process Equipment manufacturer; 2015 consists of 6 quarters

*Please note that 2015 consists of 6 quarters (normally 4 quarters) which make the sales and net profit’s number somewhat different (obviously) from previous year

Management’s movement

Because of the management, debt is something not to worry about. In fact, they used most of their Free Cash Flow to reduce their debt by 44m (including hire purchase). This gives me confident that they are not risking their balance sheet to give out dividend.

Interestingly, insiders have been collecting shares through a dividend re-investment plan. They are more informed than me, so I guess it’s a good sign. It helps when the company itself is a family-owned business which means they are more likely to take good care of it rather than risking it to get those tasty bonuses.

Quick Valuation

The assumptions that i use in this valuation model are simple. 1)discount rate is 8%, 2)Business is able to sustain its earning (or growth), 3) growth (2nd figure) is 4% which is the rate of GDP growth + Inflation.

The result is simple, if they are able to sustain its earnings without growth and declining, the estimated value is around RM5.8 per share. But if success is able to growth 4% of its residual earnings for rest of its business life, estimated value will be around RM8.9 per share. Its quite unlikely that it grow 4% of residual earnings for a long period, but this is just the upside.

Risk

Like most investment, you are playing against the odds and you will need to those odds to be in your favor. But having good odds doesn’t mean that there is no risk.

• Possible continuing bleeding division (process equipment) due to the exposure to O&G Sector.
• Competitors as it only rely on customer networking for its competitive advantage

Final thoughts

No unique insights but the quantitative areas in this company are promising. Plus, management is doing a great job on recovering from a bleeding division. Currently, a P/E of 8 makes it an attractive buy.

After a week planning on writing this, the company proposed an interim dividend of 5 sen. The key word is “interim” because the most dividend the company gave to shareholders was 5 sen for whole financial year. This signaled a legit growing business, that is producing healthy free cash flow. But the market went the opposite way and dropped. The lack of coverage might be the cause this low valuation to persist.