Electric Switchgear

Mikro MSC Bhd (KLSE: 0112) was founded in 1997 by two engineers (Wong Yin Wah and Fong See Ni) and businessman, Yim Yuen Wah. It was then listed in ACE market of Bursa Stock Exchange in year 2005.

The company develops and manufactures electrical distribution products such as overcurrent and earth fault relays, metering solutions and power factor regulators. These electrical distribution products are used in many buildings to monitor and prevent damage to electrical equipment by isolating and tripping a circuit breaker when electrical fault is detected.

Mikro Products-Mikro Products(Source: Company Website)

Since July 2017, the company’s share price has fallen significantly from RM0.56 to RM0.285 per share, at the time of writing. This accounts for approximately 49.1% dropped in shareholders’ value.

Mikro Share Price Chart-Mikro Share Price Chart(Source: Google)

When a company’s share price dropped significantly, we should examine whether this is an investment opportunity or not. So, here are the 5 key insights about Mikro MSC Bhd (“Mikro”) that you should know before investing in it:

#1: Deteriorating Financial Performance Since 1Q 2018

Mikro Chart 1-Mikro Chart 1

The main reason for the significant dropped in Mikro’s share price is due to its poor quarterly results. Since 1Q 2018, the company posted lower profits consecutively. For its recent quarter (4Q 2018), Mikro’s profit for the period is lower by 81.3% against its 4Q 2017.

According to the management comments, the lower profits is caused by the higher tax payments due to the expiry of Mikro’s Pioneer Status since 30 May 2017 which previously allow the company to enjoy tax incentives.

#2: Lowest Costs Producer

Mikro Chart 2-Mikro Chart 2(Source: Morningstar.com)

Despite the deteriorated financial results, Mikro’s earnings power is still looking good. The company managed to maintain its GP margin at above 49% for the past 10 years. However, its NP margin has dropped to 16.5%. I suspect this will be the trend moving forward as the company’s pioneer status has expired. Nevertheless, it is still within its 10 years NP margin range (i.e. between 14.4% and 21.6%).

I can’t help but noticed the high GP margin that Mikro is generating. This is a sign that the company has some competitive advantage known as “lowest costs producer”. However, there seems to be little to no information on how the company were achieve this high GP margin and still able to charge a significantly lower price than its competitors.

#3: Diversified Source of Revenue

Mikro Chart 3-Mikro Chart 3

Approximately 43.7% of Mikro’s revenue comes from overseas market mainly Vietnam followed by Iran, India and other countries. This could be one of the risk that you should take note of, any weakening of Ringgit Malaysia may lead to the company incur forex losses.

Nevertheless, a well-diversified source of revenue provides certain protection against the recent negative sentiments in Malaysia such as political risk.

#4: Growth is Coming from Vietnam Market

Mikro Chart 4-Mikro Chart 4

Vietnam market has been growing significantly at CAGR of 41.5% over the past 8 years. Thanks to the country’s local government promoting higher efficiency and scope of infrastructure projects through foreign and private investment via public-private partnerships and equitization. This has resulted in higher number of projects (including the building of schools, hospitals, etc.) to attract foreign direct investments.

Mikro certainly benefited from this as their products are usually installed in buildings for safety purposes. This explains why its revenue from Vietnam market has rapidly increased. However, a closer look at its latest Annual Report 2017 noted that its revenue from Vietnam market seems to be concentrated to only 1 customer.

This is a risk that any investors should take note of. Mikro’s revenue may be affected significantly if the company losses that particular customer.

#5: Consistent Dividend Payment

Mikro Chart 5-Mikro Chart 5

Despite the poor results, Mikro still able to pay dividend of RM0.01 per share which accounts for approximately 72% dividend payout. In my opinion, companies that pay consistent dividends even in bad times provide a good indication about their fundamentals.

A quick check on Mikro’s director shareholdings would let you know that the founders (Yim Yuen Wah, Wong Yin Wah and Fong See Ni) collectively owns 43.99%. This could mean that the management’s interest is aligned with the shareholders.

My Insights: Is Mikro Currently an Investment Opportunity?

To answer the question on whether Mikro is an investment opportunity or not, it all comes down to whether you are willing to accept the following risks at current price of RM0.285 per share:

#1: Normalisation of profits due to expiry of pioneer status
#2: Weakening of Ringgit Malaysia
#3: Concentration on major customer risk
#4: Nature of ACE Market listing which often has lower liquidity than Main Market listing

At the time of writing, Mikro is trading at PE of 20.6 times which is below its average 10 years historical PE of 21.1 times. Assuming a constant dividend of RM0.01 per share, this is equivalent to a dividend yield of 3.5%.

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