Cash is king. In the business world, ensuring that cash is sufficient to fund operations and growth is critical to a firm’s success. Besides, the most liquid asset offers the firm the cushion and flexibility it needs when opportunities knock on its door.
Amassing a war chest of its own is AWC. The leading engineering services group in Malaysia ended the most recent quarter with a cash mountain of RM70.6 million. This is almost a nine times jump over a course of about 12 years. As at 30 June 2003, AWC had RM8 million in cash and cash equivalents.
To put this into perspective, the cash pile accounts for nearly 90 percent of AWC’s market capitalisation. What is notable is that after deducting its total borrowings, net cash represents 87.5 percent of the firm’s market value. While more is not necessarily better, it certainly opens up a lot more options for AWC.
One-Stop Provider With A Focus On Eco-Friendly Solutions
How did the company make it to this enviable position? AWC is organised into three complementary operating segments, all of which promote energy conservation and reduction of carbon footprint.
As a total asset management specialist, the company serves office, commercial, industrial, residential and administrative building owners. Via its “one stop” integrated facilities management services and engineering solutions units, AWC provides a range of services spanning from electrical, mechanical, civil, structural maintenance to energy, utility, vertical transport, security and safety management.
Its clientele ranges from the public to private sectors. Some of the buildings it is servicing include Wisma Mahmud in Kuching and Bintulu Port Authority.
Wrapping up the whole package, AWC’s environment arm offers a waste collection system that is marketed under the STREAM brand. Carried out via its 51 percent-owned Nexaldes, the company employs its own proprietary pneumatic technology for large scale waste collection in residential, commercial and industrial establishments. Currently, AWC has on-going projects in Malaysia, Singapore, United Arab Emirates and Qatar.
Recurring Income
Since the disposal of its loss-making technology unit in FY13, the firm derives over 50 percent of its income from its facilities management services arm. Over 70 percent of that comes from the federal government for maintenance of its buildings under a concession agreement. The concession, which is currently on interim extension, provides earnings visibility, particularly with the conclusion of concession rates revision with the government in FY13.
For its engineering and waste collection segments, income is very much contract driven and is recognised based on percentage of completion.
For the half-year ended 31 December 2014, earnings surged multiple folds to RM5 million on the back of a 25.8 percent jump in revenue and improved margins. The performance was mainly driven by higher project income and reversal of allowance for impairment at AWC’s environment unit.
This followed a strong showing in FY14 where earnings grew 52.7 percent year-on-year to RM7 million.
Lumpy Operating Cash Flow
While improvements are spotted in the bottom line, we zoom in further to assess AWC’s financial health. To do that, we looked at the net operating cycle, which is the time required for a business to turn purchases into cash receipts from customers.
One can see that it is now taking longer for the company to collect cash from sales of its inventory. For the past five years, net operating cycle lengthened from 73 days to 170 days. This translated to the lumpy operating cash flows AWC has been facing largely due to working capital requirements.
To keep its business running, AWC has been using its cash reserves to act as a buffer in periods when there is a shortfall in liquidity. This also means that there will be swings in cash balances from year to year, unless the company opts for other financing alternatives.
Cash Reserves And Operating Cash Flow
Source: FactSet
Given that debt level is low around RM3 million, coupled with an interest coverage of 20.5 times as at 30 June 2014, this also gives AWC access to debt headroom should there be unforeseen events.
Long-Term Prospects
Going forward, demand for AWC’s building management expertise, security and access systems for buildings and waste management expertise will be driven by the rapidly urbanising Malaysia.
As of 2013, 73 percent of the nation’s population is living in urban areas. According to CIA World Factbook, the rate of urbanisation in Malaysia is estimated to be 2.5 percent from 2010 to 2015. This represents growth opportunities for AWC.
In addition, the value proposition of its eco-friendly management practice would differentiate AWC from its competitors.
Numerous Headwinds
It is not all smooth sailing though.
Looking at its main revenue contributor, the concession contributes to majority of its facilities’ segment income. With a fixed-price deal, AWC has to work on control cost measures to maintain profitability.
While AWC had limited success in its penetration into the private sector in its quest to expand its integrated facilities management services in the past, the situation seems to have changed for the better.
The company recently made inroads into the local healthcare sub-segment involving provision of biomedical and facilities engineering maintenance services in Hospital Rehabilitasi Cheras and extended facilities management services to telco stores and outlets of Celcom Axiata and the new Heriot-Watt University Malaysia Campus in Putrajaya. These new businesses would reduce the company’s reliance on the concession agreements.
As for its engineering segment, the company faces intense competition in a business that is closely pegged to the cyclical construction sector in Malaysia and Singapore. With the company actually incurring an operating loss in 3Q15, it remains to be seen if AWC’s new strategic thrust as announced in its annual report for FY14, which includes the introduction new cutting edge products and solutions, is yielding results.
SI’s Takeaway
The ratio of cash to market capitalisation is just a snapshot of the company’s condition at a certain point of time.
While one may feel more secure about a significant portion of the company’s market capitalisation being backed by pure cash, it might not be in the best interest of shareholders’ as it has an opportunity cost.
Investors should also pay more attention to what the company plans to do with the cash that can eventually take the firm to the next level.
This article is brought to you by Bursa Malaysia Berhad. The research in this article was conducted independently by Pioneers & Leaders (Publishers) Pte Ltd (“Pioneers & Leaders”) and the views and opinions expressed in this article are Pioneers & Leaders’ own and do not represent the views and opinions of Bursa Malaysia. Bursa Malaysia does not warrant or represent, expressly or impliedly as to the accuracy, completeness and currency of the information in this article. In no event shall Bursa Malaysia be liable to the reader or any other third party for any claim howsoever arising out of or in relation to this article.
http://www.sharesinv.com
Amassing a war chest of its own is AWC. The leading engineering services group in Malaysia ended the most recent quarter with a cash mountain of RM70.6 million. This is almost a nine times jump over a course of about 12 years. As at 30 June 2003, AWC had RM8 million in cash and cash equivalents.
To put this into perspective, the cash pile accounts for nearly 90 percent of AWC’s market capitalisation. What is notable is that after deducting its total borrowings, net cash represents 87.5 percent of the firm’s market value. While more is not necessarily better, it certainly opens up a lot more options for AWC.
One-Stop Provider With A Focus On Eco-Friendly Solutions
How did the company make it to this enviable position? AWC is organised into three complementary operating segments, all of which promote energy conservation and reduction of carbon footprint.
As a total asset management specialist, the company serves office, commercial, industrial, residential and administrative building owners. Via its “one stop” integrated facilities management services and engineering solutions units, AWC provides a range of services spanning from electrical, mechanical, civil, structural maintenance to energy, utility, vertical transport, security and safety management.
Its clientele ranges from the public to private sectors. Some of the buildings it is servicing include Wisma Mahmud in Kuching and Bintulu Port Authority.
Wrapping up the whole package, AWC’s environment arm offers a waste collection system that is marketed under the STREAM brand. Carried out via its 51 percent-owned Nexaldes, the company employs its own proprietary pneumatic technology for large scale waste collection in residential, commercial and industrial establishments. Currently, AWC has on-going projects in Malaysia, Singapore, United Arab Emirates and Qatar.
Recurring Income
Since the disposal of its loss-making technology unit in FY13, the firm derives over 50 percent of its income from its facilities management services arm. Over 70 percent of that comes from the federal government for maintenance of its buildings under a concession agreement. The concession, which is currently on interim extension, provides earnings visibility, particularly with the conclusion of concession rates revision with the government in FY13.
For its engineering and waste collection segments, income is very much contract driven and is recognised based on percentage of completion.
For the half-year ended 31 December 2014, earnings surged multiple folds to RM5 million on the back of a 25.8 percent jump in revenue and improved margins. The performance was mainly driven by higher project income and reversal of allowance for impairment at AWC’s environment unit.
This followed a strong showing in FY14 where earnings grew 52.7 percent year-on-year to RM7 million.
Lumpy Operating Cash Flow
While improvements are spotted in the bottom line, we zoom in further to assess AWC’s financial health. To do that, we looked at the net operating cycle, which is the time required for a business to turn purchases into cash receipts from customers.
One can see that it is now taking longer for the company to collect cash from sales of its inventory. For the past five years, net operating cycle lengthened from 73 days to 170 days. This translated to the lumpy operating cash flows AWC has been facing largely due to working capital requirements.
To keep its business running, AWC has been using its cash reserves to act as a buffer in periods when there is a shortfall in liquidity. This also means that there will be swings in cash balances from year to year, unless the company opts for other financing alternatives.
Cash Reserves And Operating Cash Flow
Source: FactSetGiven that debt level is low around RM3 million, coupled with an interest coverage of 20.5 times as at 30 June 2014, this also gives AWC access to debt headroom should there be unforeseen events.
Long-Term Prospects
Going forward, demand for AWC’s building management expertise, security and access systems for buildings and waste management expertise will be driven by the rapidly urbanising Malaysia.
As of 2013, 73 percent of the nation’s population is living in urban areas. According to CIA World Factbook, the rate of urbanisation in Malaysia is estimated to be 2.5 percent from 2010 to 2015. This represents growth opportunities for AWC.
In addition, the value proposition of its eco-friendly management practice would differentiate AWC from its competitors.
Numerous Headwinds
It is not all smooth sailing though.
Looking at its main revenue contributor, the concession contributes to majority of its facilities’ segment income. With a fixed-price deal, AWC has to work on control cost measures to maintain profitability.
While AWC had limited success in its penetration into the private sector in its quest to expand its integrated facilities management services in the past, the situation seems to have changed for the better.
The company recently made inroads into the local healthcare sub-segment involving provision of biomedical and facilities engineering maintenance services in Hospital Rehabilitasi Cheras and extended facilities management services to telco stores and outlets of Celcom Axiata and the new Heriot-Watt University Malaysia Campus in Putrajaya. These new businesses would reduce the company’s reliance on the concession agreements.
As for its engineering segment, the company faces intense competition in a business that is closely pegged to the cyclical construction sector in Malaysia and Singapore. With the company actually incurring an operating loss in 3Q15, it remains to be seen if AWC’s new strategic thrust as announced in its annual report for FY14, which includes the introduction new cutting edge products and solutions, is yielding results.
SI’s Takeaway
The ratio of cash to market capitalisation is just a snapshot of the company’s condition at a certain point of time.
While one may feel more secure about a significant portion of the company’s market capitalisation being backed by pure cash, it might not be in the best interest of shareholders’ as it has an opportunity cost.
Investors should also pay more attention to what the company plans to do with the cash that can eventually take the firm to the next level.
This article is brought to you by Bursa Malaysia Berhad. The research in this article was conducted independently by Pioneers & Leaders (Publishers) Pte Ltd (“Pioneers & Leaders”) and the views and opinions expressed in this article are Pioneers & Leaders’ own and do not represent the views and opinions of Bursa Malaysia. Bursa Malaysia does not warrant or represent, expressly or impliedly as to the accuracy, completeness and currency of the information in this article. In no event shall Bursa Malaysia be liable to the reader or any other third party for any claim howsoever arising out of or in relation to this article.
http://www.sharesinv.com
