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

April 2017 Share Portfolio

 

Dear Readers,

It is always good to know about yourself before starting on an investing journey. As for me, my attributes are:

  1. I would class myself as a somewhat medium to high risk investor.
  2. I subscribe to the principles of value investing with minor tweaks of my own.
  3. I buy to hold and will only sell when the opportunity arises.
  4. I am poorly disciplined, unfortunately.

Investing is very personalised. What may have worked for me might not work for you. Therefore it is prudent that you plan an investment strategy which suits you. I don’t mind if you take pointers from this site but don’t treat them as a recommendation.

Lets get the ball rolling with the introduction of my share portfolio. It will be updated periodically.

NO. COUNTER COMPOSITION (%) AVERAGE PRICE LAST PRICE GAIN/LOSS (%)
1. AFFIN 12.53 2.65 2.88 8.51
2. AIRASIA 29.39 2.69 3.01 11.71
3. CIMB 15.84 4.87 5.46 11.51
4. ELSOFT 18.45 1.66 2.12 27.60
5. SENERGY 10.05 1.79 2.00 11.40

The remaining 13.7% of my portfolio is in cash.

All of the companies above declared dividends in the last quarter. Below are the dividends for your reference.

NO. COUNTER DIVIDEND PER SHARE
1. AFFIN RM0.045
2. AIRASIA RM0.12
3. CIMB RM0.12
4. ELSORT RM0.04
5. SENERGY RM0.01

It should be noted that some counters, such as CIMB and AFFIN, offer a dividend investment scheme (“DRS“) to members.

Dividend Investment Scheme

Coincidentally, I’ve just received a CIMB DRS form along with a CIMB annual report.

20170408_154405
CIMB: We have your interest at heart. Instead of hiring proper models, we got our bank tellers, with really poor eye-coordination, to model the front page of our Annual Report.

Members may elect to reinvest the dividends in would-be newly allotted shares for a discount. According to the DRS form:

The Issue Price of RM4.74 per CIMB Share represents a discount of approximately ten percent (10%) to the theoretical ex-dividend price of RM5.26 per CIMB Share, which was arrived at after taking into consideration the five (5)-market day VWAMP up to and including 15 March 2017, being the last trading day prior to the Price Fixing Date of RM5.38 per CIMB Share and the dividend per share of 12.00 sen per CIMB share.

I intend to exercise the option to reinvest. Why? It’s a no-brainer!

Since 15 March 2017, the price of a CIMB share has increased to RM5.46. Exercising the option to reinvest now represents a 12.8% discount! Not bad at all.

  • RM5.46 – RM4.76 = 0.70
  • RM0.70 ÷ RM5.46 x 100%
  • 12.8%

Other than providing a bang for your buck, DRS also helps to compound your returns over time. As a long term investor, these are the qualities which I need for my portfolio to grow.

Are there any other companies offering a Dividend Reinvestment Scheme? Do share.