ACE MARKET-LISTED MMS Ventures Bhd (MMSV) has seen a tripling of its share price so far this year, making it one of Bursa Malaysia’s top performing stocks. The stock continued its ascent even after an unusual market activity (UMA) query was issued in September and hit a multi-year high of 69.5 sen on Nov 10.
While market speculation may have played a part in the share’s performance, the company’s improving fundamentals seem to be the direct result of a major change in strategic direction initiated three years ago.
In 2011, MMSV switched from semiconductors to automation solutions for the LED lighting industry, from which it now derives about 80% of its revenue. Products offered by the group include LED testers and automated handlers, which are essential components of the lighting industry.
In a reply to The Edge, MMSV chairman and CEO Sia Teik Keat says its involvement in the LED industry will be the key earnings driver in the coming years. “We have proven our ability to deliver customised machines to meet the demand from the LED and smart device industries. For example, the recent increase in revenue within Asia came from China and was attributed to sales related to smart devices.”
In the first half of its financial year ending Dec 31, 2014 (1HFY2014), the group reported a net profit of RM4.03 million, or a 91% increase from RM2.11 million in 1HFY2013. Revenue for the first six months came to RM16.47 million, up 39% from RM11.84 million in the previous corresponding period.
The increase in its revenue mostly came from Asia (excluding Malaysia), which more than tripled to RM4.5 million in 1HFY2014 from RM1.45 million in 1HFY2013. This points to strong demand growth from China for machinery related to the LED industry.
As MMSV looks to be on track to record its best full-year financial performance since it listed in 2004, Sia is confident that the recent bump in earnings was not a one-off occurrence. “The strong earnings trend will continue over the coming quarters as the LED industry continues to grow.”
While the switch in core competence certainly came with risks, the group is now hoping to ride an industry that is expected to grow by leaps and bounds. According to AllianceDBS Research, the global LED lighting market doubled in value to US$13 billion y-o-y in 2012 and is forecast to grow to US$19.9 billion in 2014 and US$34.7 billion by 2016.
The hike in demand will force major LED makers to expand their production capacity, which bodes well for automation solution providers such as MMSV. While Sia declines to disclose the names of MMSV’s clients, it is believed that they include international players such as Philips Lumileds Lighting Co and OSRAM Licht AG.
At present, the group plans to move up the value chain by growing its R&D initiatives. With 5% to 10% of its net income allocated for R&D, MMSV is focusing on the LED manufacturing process with a view to establishing a market niche in high-power LED production.
Fundamentally, MMSV’s balance sheet looks solid with room for growth. It has zero debt and is light on assets — except for a 55,000 sq ft factory in Bayan Lepas, Penang — which minimises its fixed costs. To put things into perspective, its revenue of RM26.68 million for FY2013 was nearly equal to the group’s total assets of RM26.75 million as at Dec 31, 2013.
However, with a cash balance of just RM3.57 million as at June 30, MMSV may have to raise funds to realise its ambitions. After nine years in the ACE Market, a transition to the Main Market would boost the company’s image and allow high-profile institutions to invest in it.
“It (Main Market transition) has always been a part of our plan, but no timeline has been fixed. We have been approached by many interested institutional investors of late,” says Sia.
In a non-rated note on MMSV, AllianceDBS believes that the stock deserves a fair value of 73 sen, which implies a 25% upside to its
Nov 13 closing price of 58 sen. “We forecast MMSV to record a strong compound annual growth rate of 32% over FY2013 to FY2016. We also like the company for its net cash position, superior margins of above 24% and high return on equity of above 28%.”
In spite of the overall bullish prospects, the company is still exposed to the LED industry’s environment, which Sia says can be both cyclical and dependent on economic growth. A slowdown globally will directly affect demand for MMSV’s products, which will in turn dampen sales.
For example, AllianceDBS says, the group booked weak revenues in 2011-2012 due to overcapacity in the LED industry. However, the subsequent sharp drop in LED prices accelerated the adoption of LED for general lighting purposes.
At the moment, MMSV is confident that it is well positioned for the next upcycle, which will translate into earnings growth as well as consistently high margins.
This article first appeared in The Edge Malaysia Weekly, on November 17 - 23, 2014.
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