INVESTMENT HIGHLIGHTS

• Diversification from timber business to ERP and IOT provides ARB with quantum leap in earnings

• Company’s large pool of clientele consists of underserved SMEs as well as GLCs

• Leveraging on unique partnership model to roll out IT software and platforms and to ensure customer stickiness

• Cash-rich balance sheet further supported by on-going conversion of irredeemable convertible preference shares

• We ascribe ARB with a fair value of RM0.51

Company background. ARB Bhd started off in the timber business. Subsequently, it diversified into the provision of IT services, especially in the field of enterprise resource planning (ERP) and internet of things (IOT) solutions.

Fruitful diversification. Subsequent to the diversification, ARB’s financial performance has improved tremendously. This is mainly attributable to the existing low adoption rate of Small and Medium Enterprise (SMEs) business digitalisation and Government-linked Companies in South East Asia. As seen in the company’s 2019 financial performance, both the revenue and earnings grew by more than five folds. Moving forward, we expect the earnings growth prospect to remain exciting.

Unique ERP business model. Moving away from the traditional ERP pricing model, ARB’s unique business proposition includes the setup of a joint venture (JV) company with its partner. Under this arrangement, ARB will provide the necessary investments required to set up the ERP platform while the partners need only to impart their business knowhow. Nonetheless, we understand that in the initial years both parties have agreed to plough back the entire profits for reinvestment purposes.

Strong cash position. In order to implement the ERP business model, having a healthy cash reserve is important. In this regard, ARB’s FY19 cash level has grown significantly to RM27.6m. This is achieved via the profit-making IT business as well as cash injection from its main shareholder through the conversion of ICPS. Thus, we do not expect any dividend payments in the foreseeable term as new cash generated will be reinvested for future expansion.

Business risk. We have identified three main risks associated with ARB’s key businesses. These include: (i) risks of new entrants; (ii) exposure to the industry the partner operates in and; (iii) risk of obsolescence.

Fair value. We value ARB at RM0.51, premised on pegging FY21F EPS of 11.9sen against forward PER of 4.3x. The premium multiple reflects the company’s high-yielding diversification strategy to the IT business from timber business previously.

Source: MIDF Research - 16 Jun 2020