Analysis of Elsoft Research Bhd

Introduction

Elsoft Research Bhd (“ELSOFT“) is in the business of research, design and development of test and burn-in systems and application for semiconductors. In simple terms, ELSOFT is in the business of designing and producing automated test equipment (“ATE“) to test a semiconductor-based product.

Business segments

The growth engine of ELSOFT lies in two major segments: automotive and smartphone segments.

led-daytime-running-lights_100184374_m
Daylight running lights

In the automotive segment, ELSOFT develops ATE which tests daylight running lights, LED headlamps and rear-end signature lighting for branded cars.

In the smartphone segment, ELSOFT develops ATE which tests the LED component of a smartphone.

Financials

I have designed a basis template of ELSOFT’s financials from FY2011 to FY2016.

DATA 2016* 2015 2014 2013 2012 2011
REVENUE (RM’000) 63613 49741 45143 25218 18758 12653
PROFIT (RM’000) 31186 26045 20133 10823 6620 4938
OPERATING PROFIT (RM’000) N/A 26313 19576 10434 6585 4349
SHAREHOLDERS’ EQUITY (RM’000) 98303 83258 73585 60728 55351 50550
DEBT (RM’000) 13327 9843 7675 4350 5125 5724
RATIO
DEBT TO EQUITY 0.13 0.11 0.10 0.07 0.09 0.11
OPERATING PROFIT MARGIN N/A 0.52 0.43 0.41 0.35 0.34
OCF RATIO 2.51 1.915 1.954 2.842 1.002 0.553
PROFIT MARGIN 0.49 0.52 0.44 0.42 0.35 0.39
EPS (CENTS) 11.5 9.6 11.1 6.0 3.7 2.7
EPS (ADJUSTED) CENTS 11.4 9.6 7.4 3.9 2.4 1.8
DPS (CENTS) 10 8 7 3 2 2
DIVIDEND PAY OUT 0.86 0.55 0.63 0.5 0.54 0.74
P/E 14.37 13.43 16.10 11.29 10.14 15.38
ROE 31 31 27 18 12 9

Note: * FY2016 is unaudited

From my calculations, the compounded growth rate of the company, between FY2011 to FY2016, is a whopping 36%. Notably, ELSOFT’s profit margin is strong, between a range of 40-50%. This indicates that the company is not in a price competitive industry and/or its products have a competitive edge over similar products in the market.

ELSOFT’s customer base is from Malaysia (~90%), China (~7.8%) and Taiwan (~2.25%).

The automotive segment contributes close to 50% of ELSOFT’s revenue whilst the smartphone segment contributes a respectable 37%. General lighting contributes 13%.

Potentials

Through its R&D, ELSOFT has developed two new products:

  1. next generation test and burn-in solution for the automotive and general lighting segments; and
  2. ATE for solar cells.

This would be, I believe, ELSOFT’s first foray into the solar cell segment.

ELSOFT intends to enter into the medical devices market to develop control boards or embedded control systems for kidney dialysis machines. This will start as soon as ELSOFT obtains an European quality certification for medical devices.

For the 1st quarter of FY2017 (until 31 March 2017), it has a book order of RM27 million already. To the contrary, book order for the 1st quarter of FY2016 was RM21.5 million and a full year’s (FY2016) book order stood at RM49 million.

Conclusion

I like ELSOFT for the following reasons:

  1. High profit margin.
  2. Strong growth rate.
  3. Strong R&D.
  4. Low debts.
  5. Strong cash flow.
  6. Anticipated growth in the semiconductor industry in FY2017.
  7. 40% dividend payout policy.
  8. There are still value in its shares despite a 1-year increase of 71%.

I dislike ELSOFT for:

  1. Reliance on R&D.
  2. 90% of its customer base is in Malaysia.
Disclose

I own shares in ELSOFT and will continue to acquire more of ELSOFT’s shares.

References:

  1. http://www.theedgemarkets.com/my/article/elsoft-expands-business-new-segments-and-products
  2. http://www.readitquik.com/news/allied/worldwide-semiconductor-industry-to-soar-in-2017/
  3. https://www.zacks.com/commentary/100510/semiconductor-industry-outlook—january-2017
  4. http://www.theedgemarkets.com/my/article/facing-challenges-semiconductor-merger-mania
  5. https://markets.ft.com/data/equities/tearsheet/financials?s=ELSOFT:KLS

2 thoughts on “Analysis of Elsoft Research Bhd”

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