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Monday, May 12, 2014

Elsoft sees big boost from medical device segment (extr. Edge)

ACE Market-listed Elsoft Research Bhd, which specialises in the provision of automated testers for light-emitting diodes (LEDs), has a new core business in the medical equipment industry. This is expected to be its next growth catalyst.

The Penang-based company is diversifying into embedded systems for medical devices, which could have an even better prospect than its current business, says CEO Tan Cheik Eaik.

Embedded systems contain programmes for every electronic device. In the case of medical instruments, these embedded systems could be used in devices for the chemical analyses of urine or blood samples, or automated dialysis machines, he explains. ...

He expects the medical device segment to begin generating sales in the second half of this year, as Elsoft’s customer — a medical device producer — has secured a deal to supply the medical instruments to local hospitals....

Nevertheless, Tan concedes that the margins for embedded systems for medical devices will not be as good as those for its existing business — the margins for automated testers for LEDs can easily reach 30%. It will be a volume game, he says.

For the financial year 2013 ended Dec 31, gross margin was 47.4%, higher than the previous year’s 39%. Elsoft reported a gross profit of RM11.95 million in FY2013, compared with RM7.31 million in the previous year. Revenue was also higher at RM25.22 million versus RM18.76 million the year before.

To ensure that it does well in the volume game, Elsoft maintains a lean workforce of about 60 employees.

“Our staff strength has been the same for many years. You can see that our capacity can stretch quite far — judging from the growth in our annual sales, from RM12 million to RM18 million to RM25 million — and we have some fixed costs. So, when we receive more orders, this will reduce our cost,” says Tan.

Currently, Elsoft’s earnings come from its test, burn-in and embedded peripherals, and automation equipment/systems.

According to Tan, more than half of the company’s revenue since 2005 has come from one of the world’s largest LED makers. “I feel like it has become an interdependent relationship [between Elsoft and the LED manufacturer].”

Elsoft, which was listed in 2005, has met the requirements to move to the Main Market. Its accumulated net profit in the past three financial years had exceeded RM20 million.

The company achieved a net profit of RM10.82 million, or 5.98 sen per share, in FY2013 — 63.5% higher than RM6.62 million, or 3.66 sen per share, it recorded in the previous year. Its FY2013 profit was the closest so far to its record net profit of

RM16.83 million, or 13.07 per share, achieved in FY2005. That year, it reported revenue of RM33.31 million.

“I’ll always remember those ‘magic numbers’ — 16 and 33,” Tan says...

Elsoft had an order book of more than RM25 million as at end-April, which can last the company until 3QFY2014. Tan says there should be more orders coming in this quarter.

In the past year, the company’s share price had doubled to 72 sen as at last Wednesday, giving it a market capitalisation of RM130.34 million. The stock’s liquidity could be an issue though, as the directors alone held 65.16% of Elsoft’s shares as at April 30, 2013, while the top 30 shareholders collectively held a 92.59% stake.

However, it is worth noting that the company has a share premium of RM15.17 million, which may come in handy if it decides to expand its share capital. Currently, it has an issued share capital of 181.02 million shares. If Elsoft tops up another RM3 million or so, it would have enough to issue bonus shares on the basis of one share for every share held.

While Tan does not rule out the possibility of a bonus issue, he says there is no concrete plan for that yet.

Elsoft’s shares are trading at a historical price-earnings ratio of 12 times based on earnings per share of 5.98 sen. This is rather high for an ACE Market-listed counter. Should the new business help accelerate the company’s growth, its current valuation may be justifiable.

This article first appeared in The Edge Malaysia Weekly, on May 5, 2014.

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