The technology sector is known for its boom and bust cycles and investors normally exercise extra caution when putting their money in tech-related stocks. Over the past two years, the sector has not been spared the effects of the economic slowdown. Since 4Q2009, however, there have been some bright spots.
Apart from US technology companies posting sterling results, there are strong signs of growing consumer demand for technology products, judging from the brisk sales of Apple’s iPads and iPhones.
Another positive indicator is the rebound in the global semiconductor industry — semiconductors are an important component in the technology sector.
Last Wednesday, local technology stocks received a boost from strong global chip sales. The US-based Semiconductor Industry Association (SIA) reported that worldwide semiconductor sales in April rose 2.2% to US$23.6 billion from US$23.1 billion in March. Sales were up 50.4% compared to last April’s US$15.7 billion. Sales for the first four months of this year were US$92.6 billion versus US$60.1 billion a year ago.
According to SIA president George Scalise, key contributors to semiconductor sales included the worldwide adoption of 3G wireless communications and consequent investment in infrastructure as well as a recovery in demand in the enterprise, automotive and industrial sectors.
Among the local technology stocks that rose were Unisem (M) Bhd, HeiTech Padu Bhd, Malaysia Pacific Industries Bhd, JCY International Bhd and Mesiniaga Bhd. These stocks trended upwards although the FBM KLCI took a dive last Wednesday.
They have relatively big market capitalisation and are well known among investors. What is worth noting is that a number of small cap tech companies have also registered consistent growth but are mostly off investors’ radar screens.
These gems include CBS Technology Bhd, Efficient E-Solutions Bhd, Eng Teknologi Holdings Bhd, My E.G. Services Bhd, Opcom Holdings Bhd, Theta Edge Bhd (formerly Lityan Holdings Bhd), Kelington Group Bhd and K-One Technology Bhd.
CBS Technology, which specialises in providing radio frequency identification (RFID), e-Security and enterprise management solutions, has grown steadily from FY2002 to FY2007. Its market capitalisation stood at RM78.5 million as at June 2. The company declared its first dividend of nine sen tax-exempt and 1.35 sen less tax for FY2007, and paid close to RM10 million cash to its shareholders after having retained its profits over the years.
Despite posting higher revenue in FY2008, its earnings fell for the first time on lower gross margins, among other reasons. But the company recovered strongly to achieve record revenue and earnings in FY2009 despite the global recession.
“Our growth over the past four years until Dec 31, 2008, came mainly from the sales of new software products and an increase in customer base. Through our innovative product development, we have consistently introduced innovative RFID applications and e-Security solutions to cater for various needs and industries,” CEO Sun Chee Kong tells The Edge.
“We have deployed various RFID projects for different industries over the past five years. Our customer base has grown and we have gained a foothold in the financial institutions and government sector through the years,” he says.
In 2009, on top of organic growth, the company acquired a profitable media and content business — Infodata Media — and its wholly-owned subsidiary Super Pages Media, which contributed positively to revenue and profit growth.
Moving forward, Sun says CBS Technology will focus on technology, content and community business in Southeast Asia.
“We shall adopt an organic growth strategy and may expand our business in this region through acquisitions if opportunities arise. We will also look into joint ventures or any other form of collaboration with local partners in the region. We hope to replicate our success in neighbouring countries,” Sun says.
He adds that CBS Technology has managed to maintain its net profit margin at about 20% since FY2003 due to its innovative products, which give it a competitive edge.
“Our products are mainly home-grown. We develop our own software solutions, content database and business community. We sell our own products and hence, our selling and distribution costs are low,” he explains.
According to OSK Investment Research, CBS Technology has been able to generate a return on equity (ROE) of at least 19% since its listing in 2004 and is expected to record a 22.8% ROE this year. The company’s high free cash flow business model has enabled it to achieve commendable ROE, says the research house.
OSK likes CBS Technology’s long-term prospects given its strong free cash flow generation, net cash position and no borrowings, and expanded business opportunities following the acquisition of Infodata Media. The research house expects its earnings per share (EPS) to rise to eight sen in FY2010 from 6.9 sen in the previous year. At 33.5 sen, CBS is trading at a price-earnings ratio (PER) of just over four times for FY2010. OSK is maintaining its fair value of 48 sen.
Another small cap technology company that has been growing steadily is Efficient E-Solutions (EES), which provides outsourcing solutions in data and document processing (DDP).
One of the largest players in the local DDP industry, EES’ revenue and earnings grew for nine consecutive years and its pre-tax profit margins have stayed above 25% since FY2004. Its ROE has been ranging from 17% to 22% from FY2005 to FY2009.
OSK has a “buy” call on EES as it expects the company’s earnings and revenue to continue growing in tandem with rising demand from its customers, which include big local and foreign banks. OSK expects EES’ EPS to rise to 18.6 sen in FY2010 from 16.7 sen in the previous year. At 18 sen, the stock is trading at a forward PER of 9.6 times. The research house is maintaining its fair value of 29 sen.
Eng Teknologi (EngTek), a precision components manufacturer, is a leading strategic vendor for the hard disk drive (HDD) and industrial products industry. Its market capitalisation stood at RM293.8 million as at June 2.
The company maintains an optimistic business outlook based on expected strong demand from its customers, which include Western Digital and Seagate. Worldwide HDD shipments are expected to grow 12.5% this year.
EngTek posted its highest quarterly earnings in 4QFY2009 while its full-year FY2009 earnings of RM43.5 million were also its highest recorded despite a 14.4% drop in revenue. OSK expects EngTek’s fully diluted EPS to rise to 43.4 sen in FY2010 from 34.4 sen in the previous year. At RM2.50, the stock is trading at a FY2010 PER of 5.7 times. The research house is pegging a fair value of RM3.25 to Engtek based on 7.5 times FY2010 PER.
MyEG is no stranger to the technology space, although it is technically more an internet play. It provides e-services such as electronic delivery of driver and vehicle registration, licensing and summons services and utility bill payments.
According to reports, the company has received the federal government’s endorsement to roll out an online tax monitoring system for entertainment outlets and eateries in the Klang Valley.
This new business venture could be the next big thing for MyEG. Last year, the government collected about RM3.3 billion in service tax and a further RM8.3 billion in sales tax while sales and service tax from entertainment outlets amounted to some RM500 million, according to reports.
For the year ended June 2009, MyEG posted a net profit of RM17.2 million on the back of RM52.48 million in revenue. In contrast to a year ago, MyEG’s net profit increased by 16.37% while revenue jumped 19.76%.
Research firm InsiderAsia, in a March 2 report, says it expects the company’s net profit to grow 45% to RM24.9 million, or 4.1 sen per share. At 57 sen, its FY2010 PER is relatively higher at 13.9 times, but MyEG offers very strong growth prospects.
Meanwhile, Kelington Group is well positioned to ride the recovering technology sector this year with more than RM52 million in its order book YTD.
Group president and COO Oon Weng Leong said recently that it had received numerous requests for its services, with orders coming from China, Singapore, Taiwan and Malaysia.
Kelington designs, fabricates and installs ultra-high purity gas and chemicals delivery systems for the semiconductor industry. The company made its debut on the ACE Market last November at an offer price of 53 sen. The counter closed at 73 sen last Thursday.
In a research note issued last November, OSK Research says it expects Kelington’s revenue for FY2010 to grow 2.7% organically, boosted by its strong order book of RM74.98 million. The research house derived a fair value of 85 sen by applying a small cap average PER of eight times over FY2010 EPS.
This article appeared in Capital page, The Edge Malaysia, Issue 809, Jun 7-13, 2010.
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