1. Investment Highlights/Summary

• BCM Alliance Berhad (BCM) specialises in the distribution of commercial laundry equipments and medical devices industries in Malaysia.

• BCM was listed on the ACE Market of Bursa Securities on 24-Oct-16 at an IPO price of RM0.19/share.

• Since FY12, group turnover grew at a 4-year compounded annual growth rate (CAGR) of 35.9% to RM65.08m in FY16. Commercial laundry equipment and medical devices segments accounted for 63% and 37% of FY16 group turnover respectively.

• BCM has in place a strong management team that demonstrates good long-term operational track record. It’s well positioned to ride on the sustainable demand growth of both commercial laundry equipment and medical devices.

• We are initiating coverage on BCM with a BUY recommendation. In FY17, BCM is expected to benefit from the commencement of progress billings of a delayed new hospital project, normalisation of profitability and absence of one-off IPO expenses.

• Based on our normalised EPS forecast of 2.1 sen for FY17, the stock is currently trading at a P/E of 10.3x for FY17. Excluding net cash per share of 5.1 sen, its P/E ex-cash reduces to 7.9x. We have arrived at a fair value of 30 sen upon ascribing a target P/E of 12x and adding back the net cash of 5.1 sen/share.

2. Company Background/Overview

a) History

The history of BCM Alliance Berhad (BCM) can be traced back to 1978 with the formation of Syarikat Sunto Trading (SST) to provide maintenance, repair and installation services for various types of electrical equipments. SST was established by BCM’s Executive Deputy Chairman, Koh Lap Hing, the late Hew Foh @ Hew Foh Yew (the father of Hew Chun Shun, Executive Director of BCM) and two other partners, Wong Fai Nam and Chee Wooi Chi. In the subsequent years, Chung Eng Lam (executive director of BCM) and Hew also joined SST. It later expanded into the distribution of equipments to complement its maintenance, repair and installation services.

Leveraging on the technical expertise and experience in maintenance, repair and installation, CS Laundry System Sdn Bhd (CS Laundry), ventured into the distribution and supply of commercial laundry equipment in Dec-98. In 2004, upon the completion of a rationalization exercise of business to focus on healthcare sector, Best Contact Sdn Bhd (Best Contact) ventured into the distribution and supply of medical devices.

While the group was building on expanding customer base and improving the quality of service in commercial laundry equipment business, it also looked for new venture for expansion in the local healthcare sector. It was in 2006 where Maymedic Technology Sdn Bhd (Maymedic) was established to venture into the distribution of disinfection, sterilization and surgical room equipment.

In 2010, CS Laundry expanded its range of commercial laundry equipment to include Huebsch brand of vended commercial laundry equipment, manufactured by Alliance Laundry to meet the demand for vended laundry services. In 2013, Speed Queen, another brand manufactured by Alliance Laundry, was secured by CS Laundry.

Over the years, CS Laundry has successfully expanded its portfolio of equipments and services as well as new distributorships/brands. Concurrently, Best Contact and Maymedic have continued with their expansion by serving more hospitals and medical centres nationwide as well as securing more distribution rights from other international medical devices manufacturers.

Today, the group has become a reputable equipment distribution company serving the commercial laundry equipment and medical devices industries.

BCM was incorporated on 13-Mar-2015 as an investment holding company and listed on the ACE Market of Bursa Securities on 24-Oct-16 at an IPO price of RM0.19/share. The IPO exercise raised a total gross proceeds of RM16.0m.

b) Corporate structure

3. Business Operations

BCM Alliance Berhad (BCM) specialises in the distribution of commercial laundry equipments and medical devices industries in Malaysia.

a) Commercial laundry equipment

BCM, via wholly-owned CS Laundry is involved in the supply, installation, testing and commissioning of these equipment. It also provides after-sales repair and maintenance services. The commercial laundry equipment is used for large volume washing and heavy-duty usage in businesses providing commercial laundry services. Its equipment can be categorised into vended and on-premise commercial laundry equipment. BCM has the ability to provide comprehensive services from conceptualisation of design, supply, installation of a fully-functional laundry facility to after-sales repair and maintenance.

The Group's major products include various types of washers, tumble dryers, dry cleaning machines, flatwork ironers, spotting tables, industrial presses machines and chemical dispensing systems.

It has been appointed as the non-exclusive distributor in the Malaysian market for a total of 10 brands of commercial laundry equipment namely Speed Queen, Huebsch, Lapauw, Maxi, Forenta, Renzacci, Jensen, Senking, Domus and Sea Lion.

Its business relationship with Alliance Laundry is worth highlighting given that Alliance Laundry alone contributed 54.2% of group purchases in FY15. The US-based Alliance Laundry is an international manufacturer of commercial laundry equipment such as Speed Queen and Huebsch. The business relationship with Alliance Laundry dated back to 2001 when CS Laundry was appointed as its nonexclusive distributor for Huebsch and other brands of laundry equipment in Malaysia. Subsequently, a non-exclusive authorised distributorship of Speed Queen brand was secured by CS Laundry in 2013. On 4-Aug-15, CS Laundry was authorised by Alliance Laundry to use Speed Queen brand for setting up Speed Queen self-service laundrette in Malaysia. To further strengthen their business relationship, CS Laundry has been appointed as the sole authorised distributor in Malaysia since 19-Apr-16.

Its first Speed Queen self-service launderette was set up in Taman United, Kuala Lumpur in Sep-15, as part of the marketing strategy to showcase and promote Speed Queen brand of vended commercial laundry equipment. In addition, 4 laundry outlets operated and owned by its customers have also been designed and set up with the Speed Queen store design, floor plan and layout.

b) Medical devices

In the medical devices segment, BCM is involved in the distribution of two product categories namely 1) medical imaging equipment and 2) disinfection, sterilisation and surgical room equipment. Its customers are mainly the healthcare and medical service providers such as medical institutions/centres, physiotherapy centres and dental clinics in Malaysia.

BCM provides integral solutions to customers encompassing design consultancy, supply and installation, testing and commissioning of equipment and the setting-up of a medical imaging room or central sterile supply department, to after-sales repair and maintenance service.

The Group's major products include medical imaging equipment, including MRI systems, CT scanners, digital radiography/fluoroscopy systems, X-Ray systems, bone densitometers and CR systems, and disinfection, sterilization and surgical room equipment.

It’s currently an exclusive distributor of the following international manufacturers/brands in Malaysia:-

• Hitachi Medical Systems (S) Ptd Ltd / Hitachi Medical Corporation, a reputable Japanese manufacturer of diagnostic imaging products such as CT and MRI system;

• STERIS Corporation (for STERIS and Albert Browne brands), a leading global manufacturer of infection prevention, contamination control, surgical and critical care technologies and products; and

• Ziehm Imaging GmbH and Medifa-Hesse GmbH & Co. KG

In addition, it has also been appointed as a non-exclusive distributor for brands such as Trilux Medical, CareStream, Quantum, MinXray, Newmed, Elma and General Electric in Malaysia.

4. Financial Review

a) Revenue Breakdown by Segmental (RMm)

Since FY12, group turnover grew at a 4-year compounded annual growth rate (CAGR) of 35.9% to RM65.08m in FY16. Commercial laundry equipment and medical devices segments accounted for 63% and 37% of FY16 group turnover respectively.

• The stronger growth came from commercial laundry equipment segment, which grew at a 4-year CAGR of 95.8% to RM41.02m in FY16 due to the low base in FY12. Turnover of this segment surged significantly in FY14 after it was awarded a non-exclusive authorised distributorship of Speed Queen brand in 2013. In order to create better market awareness and acceptance in Malaysia, BCM embarked on aggressive marketing and branding efforts, complemented with competitive pricing for Speed Queen brand of vended commercial laundry equipment. From just 362 units Huebsch and Speed Queen brand of vended commercial laundry equipment sold in FY13, it grew to more than 1,900 units in FY16.

• Turnover performance of medical devices segment had been steady in FY12-16, averaging around RM25m in turnover per annum. The turnover performance of medical imaging equipment subsector was driven by the secure of new purchase orders for hospital and medical centres, which could be lumpy in certain years. Meanwhile, turnover contribution of disinfection, sterilisation and surgical room sub-sectors had been consistent at RM5.0-7.0m per annum

b) PBT Breakdown by Segmental (RMm)

c) Historical Gross Margin Trend

• The fluctuation in gross margin was attributed to the following factors:

i. Competitive pricing offered for vended commercial laundry equipment in FY13 to grow market share resulted in reduced profitability in FY13. The competitive pricing to secure orders for medical imaging equipment for hospital projects also led to reduced profitability for medical devices business; ii. Higher sales mix towards better-margin Speed Queen brand and bulk purchase discount caused profitability to improve in FY14;

iii. In the recent years in FY15 and FY16, despite higher sales achieved for both segments in FY15, BCM had to absorb an increase in the cost of purchase due to weak ringgit against US$, particularly for commercial laundry equipment segment; and

iv. Gross margin improved to 33.3% in FY16, which was consistent with the historical average gross margin of 33%. The improvement was also attributed to better sales mix of higher service content especially in the medical devices segment.

• In FY16, although gross profit grew by 13.9% to RM21.68m, PBT declined by 24.1% to RM6.13m. This was attributed to listing expenses pursuant to the IPO exercise (amounting to RM3.22m), additional headcounts on technical and administration staff to meet customers’ satisfaction, higher directors cost and advertisement expenses. There was also a delay in the delivery of medical devices to customers to 1QFY17 at customers’ request.

5. Balance Sheet

• BCM is in strong financial position. As it is involved in the distribution, trading and servicing business, the capex requirement is minimal. In FY16, its capex only amounted to RM0.56m. As at end-FY16, its net cash position improved to RM21.54m from RM2.73m (as at end-FY15) due mainly to the completion of the IPO exercise, which raised a gross proceed of RM16m. Its net cash position translates into 5.1 sen/share.

• As at end-FY16, its book value stands at 8.3 sen/share.

6. Dividend

BCM currently does not have a formal dividend policy. In FY16, BCM paid out a dividend of 0.4 sen/share, which translated into a total payout of RM1.69m.

7. Recent Developments

• BCM was listed on the ACE Market of Bursa Securities on 24-Oct-16 at an IPO price of RM0.19/share.

• On 10 Nov-16, its 100%-owned Maymedic Technology Sdn. Bhd, entered into a biomedical equipment and maintenance services contract with Quantum Medical Solutions Sdn. Bhd. for RM19.68m. The contract includes the supply, delivery, testing and commissioning of medical support services equipment (biomedical equipment), and comprehensive maintenance service at specified government clinics for the biomedical equipment. The contract service covers a 3 years period from 10-Nov-16 to 10-Nov-19.

8. Competitive Analysis

• Distributor of established and well-known brands of commercial laundry equipment and medical devices.

• Established operating track record backed by strong business background in the commercial laundry equipment and medical devices industries, long-standing business relationships with suppliers and emphasis on service reliability.

• Diversity in the comprehensive range of brands, products and services offerings to meet the demand of a diversified customer base in the retail, hospital and healthcare sectors.
• In addition, BCM has been able to conform to the requirements and regulation set by the Medical Devices Act (MDA Act) and Medical Devices Regulation (MDR Act), which is a mandatory framework for medical devices registration in Malaysia. A majority of the range of medical devices is registered with MDA Act and MDR Act, creating high barrier of entry to new entrants. In 2015, Best Contact and Maymedic were licensed as authorised representative, importer and distributor of medical devices by Medical Device Authority (MDA)
• Backed by experienced key management with technical knowhow and industry knowledge.

o Koh Lap Hing, Executive Deputy Chairman – more than 40 years of experience in commercial laundry equipment and medical devices industries. Assisting Managing Director in formulating overall business strategy;

o Liaw Chong Lin, Managing Director – more than 30 years of experience in medical devices industry. Responsible for charting overall strategic direction and management. Business unit head of Best Contact;

o Lim Jit Wei, Executive Director – more than 25 years of experience in commercial laundry equipment business segment. Business unit head of CS Laundry;

o Chung Eng Lam, Executive Director – more than 30 years of experience in the supply of disinfection, sterilisation and surgical room equipment business segment. Co-founder and business unit head of Maymedic; and

o Hew Chun Shun, Executive Director – More than 20 years of experience in commercial laundry equipment and medical devices business segments. Co-founder of CS Laundry. Overseeing finance, administration and human resources functions.

9. Earnings Outlook

• The demand drivers for its commercial laundry equipment are explained as below:-

o Increasing popularity and growing demand of self-service laundrettes due to fundamental societal/lifestyle change, urbanisation;

o Commercial appeal driving investment in self-service laundrettes;

o Conversion of traditional laundry service to self-service launderettes;

o Replacement of ageing commercial laundry equipment with eco and energy friendly equipment; and

o Increasing demand from healthcare services and hospitality sectors

• According to the estimates in the Independent Market Research (IMR) report, the size of the commercial laundry equipment industry in Malaysia is expected to grow at a 4-year CAGR of 5.8% to RM271.3m in 2020. The vended commercial laundry equipment sub-segment is expected to grow at a faster rate of 8.4% over the next 4 years to RM146.3m in 2020 due to the continued popularity of self-service laundrettes.
• It is estimated that there were 900 self-service laundrettes operating in Malaysia in 2015. Of which, approximately 496 of these outlets are installed with Speed Queen brand of vended commercial laundry equipment supplied by BCM (operated by CS Laundry’s customers).
• BCM has plans to set up 11 new Speed Queen self-service launderettes and concept stores throughout Malaysia by end-FY18. The capex allocated would amount to RM2.60m. The cost of setting up each outlet amounts to RM0.23m inclusive of purchase and installation of Speed Queen equipment and basic facilities as well as renovation costs.
• The strategy is to create market awareness of Speed Queen brand through the presence of Speed Queen outlets in Malaysia. This would in turn strive to attract entrepreneurs and investors seeking commercial opportunities in the investment of self-service launderettes in Malaysia.
• Based on estimates in IMR report, about 70% of the total self-service laundrettes in 2015 are located in Klang Valley. Hence, there is potential for growth in the other states and rural areas.
• Over the last few years, the growth trend had been pre-dominantly focused on the vended commercial laundry equipment. BCM intends to grow its on-premise commercial laundry equipment segment to take advantage of the need for replacement equipment, growing demand of laundry equipment from hospitality sector and outsourcing hub of major hospitals.

• In the longer-term, BCM plans to form strategic alliances with local players for expansion into the ASEAN region.

• The demand drivers for its medical devices business segment are increasing number of healthcare providers, providing a steady demand for medical devices. Additionally, upgrading of existing hospitals and replacement of existing equipment provide additional demand growth.

• Leveraging on its competitive strengths, it’s an ongoing strategy to deepen its penetration in both product offerings in Malaysia for both divisions. In this context, BCM intends to secure more products distributorship and to introduce more products/brands into existing customer base.

• In FY17, BCM is expected to benefit from the commencement of progress billings of the delayed new hospital project, normalisation of profitability and absence of one-off IPO expenses.

• Its total outstanding orderbook increases from RM16.3m (as at end-Aug-16) to RM45.5m (as at end-Feb- 17) following the secure of the 3-years service contract from Quantum Medical Solutions Sdn. Bhd. For RM19.68m. With the exception of this contract, most of its orderbook is short-term in nature. Its orderbook will be replenished by the ongoing quotation and purchase of equipment by customers

10. Key Investment Risks

• As the purchase of equipments is transacted in US$ & Euro, a weaker ringgit would increase the cost of purchase. To remain competitive and to grow its market share, BCM might not be able to pass-on the increase in cost of purchase to its end-customers. However, this is mitigated by bulk purchase of equipments to help lower overall costs.

• Termination or withdrawal of distributorship rights by international brand manufacturers. BCM is highly dependent on Alliance Laundry in securing vended commercial laundry equipment. Any termination of business relationship with Alliance Laundry would have a negative impact on BCM’s performance and growth prospects. The risk is reduced given its long-term business relationship with this brand manufacturer.

11. Valuation and Recommendation

• BCM has in place a strong management team that demonstrates good long-term operational track record. It is well positioned to ride on the sustainable demand growth of both commercial laundry equipment and medical devices.

• We are initiating coverage on BCM with a BUY recommendation. In FY17, BCM is expected to benefit from the commencement of progress billings of the delayed new hospital project, normalisation of profitability and absence of one-off IPO expenses.

• Based on our normalised EPS forecast of 2.1 sen for FY17, the stock is currently trading at a P/E of 10.3x for FY17. Excluding net cash per share of 5.1 sen, its P/E ex-cash reduces to 7.9x. We have arrived at a fair value of 30 sen upon ascribing a target P/E of 12x and adding back the net cash of 5.1 sen/share

Source: BCT Asia Research - 20 Apr 2017