Analysis of Elsoft Research Bhd’s Q1 FY2017 Report

Dear Readers

Elsoft Research Bhd’s (“Elsoft“) was published on 22 May 2017. I have had a read of the report since.

This post is a summary of the pertinent contents of the report and my thoughts of Elsoft’s performance throughout Q1 FY2017.

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Gaming on the job. Credit: The Star Online
Finances
  1. Revenue was up by 50.1% from the corresponding period of Q1 FY2016. On the flip side, revenue was down by  7% from last quarter being Q4 FY2016.
  2. Because revenue increased (that means more equipment was sold), cost went up. Cost of sales for Q1 FY2017 was RM7.392 million; up from RM4.309 from the corresponding period of Q1 FY2016.
  3. Elsoft recorded a net profit of  RM6.046 million which was up 285% from the corresponding period of Q1 FY2016 (RM1.562 million). However, net profit was down by 34% when compared to Q4 FY2016 (RM9.222 million).
  4. Cash and other equivalents went up by RM6.056 million from the last quarter (RM11.642 million) to RM17.698. It is good to have cash about the same amount as ones’ profit.
  5. However, from the increase in cash of RM6.056 million, only RM2.161 million (before adjustment made to take into account exchange rates) was from operating activities. Initially I thought that this was alarming compared to the RM5.7 million cash it obtained from operating activities in Q1 FY2016. However, from further perusal, the report indicates that Elsoft had pared down a lot of its cash (RM6.240 million out of the RM8.481 million cash generated from operating activities) to pay other suppliers in Q1 FY2017. When one uses cash to pay its suppliers, it will have lower cash (common sense). Elsoft still generates a majority of cash from its business.
  6. There was a loss of RM1.322 million on foreign exchange as opposed to a realised loss on foreign exchange of RM576,446.00 for the whole of FY2016. The only compelling reason for the sudden hike, in my opinion, is the the implementation of Bank Negara’s policy of requiring exporters to realise and convert 75% of proceeds in US dollar to Ringgit from December 2016.
  7. There was more demand from the automotive industry as compared to the the corresponding period of Q1 FY2016 but less demand from the smart devices industry compared to the last quarter (Q4 FY2016) .
  8. Management summed up the lower profit from last quarter due to lower of revenue, lower gross product margin, share of losses in associate and foreign exchange losses in current quarter.
  9. About 94% of revenue is derived from Malaysia, about 2% from China and the remainder from an assortment of countries, not identified.
My thoughts

In the corresponding period in FY2016, Elsoft only achieved an EPS of 0.57 cent compared to 2.20 cents in Q1 FY2017. That’s an increase of 285%. I was ecstatic! What a good way to start a year. Notwithstanding that, the market had an unexpected contrary view which caused Elsoft’s shares to drop 4.12% on 23 May 2017. This could well be that the market had so much expectation that Elsoft would perform much better than the last quarter (which it didn’t).

At the end of the day, it is a matter of perception. Should this quarter be compared to another quarter on an YoY (year over year) basis or QoQ (quarter on quarter) basis?

YoY or QoQ comparison?

QoQ comparison may not be able to consider seasonal factors which may affect the demand and thus the earnings of a company throughout a year. Therefore YoY offers a better picture for comparison.

I am of the opinion that the semiconductor industry is seasonal in nature albeit to a lesser extend than say the airlines or retail industry. For example, most smartphone flagships are released in August or September (just enough time for people to lust over them before the holiday season). Even if Elsoft states that it not affected by seasonal or cyclical factors, I am of the opinion that Elsoft’s fortune does somewhat hinges on semi conductor production. This is because an increase in smartphone production, for example, will increase the need for more automated testing equipment. Therefore to compare performance on a YoY basis would be more appropriate in Elsoft’s case.

However, how I look at things may not be how you look at things given that both of us are looking and analysing the same set of data.

The legendary Peter Lynch has often recited in his book “One Up on Wall Street” that humans are often irrational beings. This creates inefficiencies in the market which can be exploited as opportunities. When opportunities come by (very so often), make full use of them.

This was why I construed the drop in the share price, after the announcement of the Q1 FY2017 report, as an opportunity to purchase more shares in Elsoft on the backdrop of its sound financial performance and potentials.

Thank you for reading.

Reference
  1. Q1 FY2017 Report
  2. FY2016 Annual Report
  3. http://www.investopedia.com/terms/q/qoq.asp
  4. http://www.investopedia.com/terms/y/year-over-year.asp
  5. http://www.theseasonalinvestor.com/2013/09/does-seasonality-move-semiconductor.html
  6. http://www.wikinvest.com/stock/United_Microelectronics_(UMC)/Seasonality_Cyclical_Nature_Semiconductor_Industry_Periodic_Overcapacity_Make

 

How did Elsoft Research Bhd fare in FY2016?

Dear Readers

Having read Elsoft Research Bhd’s (“Elsoft“) annual report for FY 2016, after it was published 27 April 2017, I have decided to a write up which serves as an addendum to Analysis of Elsoft Research Bhd.

Let’s get right to it.

Elsoft

Finances

This is a summary of the financial performance of Elsoft between FY2015 and FY2016:

  1. Revenue increased to about 26%, from about RM49 million to roughly RM63 million.
  2. Costs of sales went up about 7.7%, from RM27 million to RM29 million, owing to an increase in staff costs and raw material consumption.
  3. Other income (indirect income) decreased about 47%, from RM7.6 million to RM4 million, because of lower contributions from other investments and lower foreign exchange gains.
  4. Administrative expenses increased about 82%, from RM3.9 million to RM7.1 million, due to an increase in staff costs, professional fees, fair value loss from other investments and recognition of shares based payments as a result of the implementation of Employee Share Offering Scheme.
  5. Lower taxation rate partly owing to 100% tax exemption under pioneer status.
  6. Inventories increased by 96%, from RM2.6 million to RM5.1 million, as a result of increasing work-in-progress to meet higher demand for FY2017.
  7. Cash or cash equivalent dropped 23%, from RM11.6 million to RM15.1 million. This is because Elsoft placed more money in money market funds with financial institutions and they are recognised as “other investments” in accounting.
  8. Trade and other payables increased 37.7%, from RM9.2 million to RM12.7 million, owing to higher purchases in FY 2016.
  9. Elsoft spent RM6.6 million or 10.4% of revenue for research and development (“R&D“).

Other salient matters worth mentioning:

  1. Elsoft employs 27 R&D engineers. Engineers work on digital and analog design, mechanical design, firmware and application software development.
  2. Elsoft has increased production and service workforce from 25 to 32 employees to keep up with demand in production.
  3. Butterfly House (PG) Sdn Bhd, a 21% owned associate of Elsoft has reopened a butterfly farm, at Teluk Bahang, Pahang, called Entopia.
Conclusion

There is no secret that FY2016 was a good ride for Elsoft. However what particularly struck me was that inventories increased by 96% owing to higher demand in FY2017.

Disclosure

I own shares in Elsoft.

Reference
  1. Elsoft’s annual report 2016