BTECH (0011) - Has current valuation of BRITE-TECH BERHAD incorporated its rosy future already?




Introduction
BRITE-TECH BHD https://klse.i3investor.com/servlets/stk/0011.jsp was incorporated in the Ace Market on 30th July of 2002 as a business that focuses on being an integrated water purification and wastewater treatment solutions provider. The company has a diversified customer base from industries such as metal finishing, electronics, semiconductor, palm oil mill, printing, hotel, chemical production, rubber glove, automotive, aviation and galvanizing.
Products and Services
Environmental Product & Services (trading and sales)
  1. Boiler Water Treatment: these treatments prevent corrossion inside boilers, reduce scaling and deposition, eliminate oxygen and acid attacks, halt dangerous metal embrittlement, increase system reliability and maximize boiler output efficiency. Such treatment is commonly demanded when the manufacturing industry is experiencing rapid growth to ensure the machineries are well maintained.
  2. Cooling Water Treatment: these programmes are designed to reduce unscheduled shutdowns, conserve energy, save manpower cost and reduce operational cost. Basically, the cooling system removes the unwanted heat but corrossion monitoring has to be done effectively to ensure no additional repair cost are incurred.
  3. Waste & Wastewater Treatment: these treatment ensures the discharge from the machineries comply with environmental regulations. In the process, sludge generation is also reduced, resulting in cost reduction. 
  4. Analytical Laboratory & Environmental Monitoring Services: water analysis. effluent analysis, soil analysis, food analysis, organic analysis, environmental air and noise level monitoring for EIA studies, air emission monitoring, wastewater characteristic studies and etc. Based on the group's revenue structure, these services seem to constitute a smaller proportion of their revenue but serve as a synergy for their other products and services in the form of added-knowledge.
System Equipment & Ancillary Products (provides consultations, engineering designs, construction and installation, and commissioning of industrial wastewater treatment, water purification, system and wastewater recycling)
  1. Biochemical Oxygen Demand Treatment: treating algae and aerobic pond discharge water to ensure the purity of the output. The company has submitted a patent for this technology and this is actually a collaboration between the Group and BioAqua of Denmark. 
  2. Waste Minimization: reduces the volume of dilute rinse water or concentrated waste streams through evaporation. This system probably eliminates any vapor discharges to the environment by condensing the vapor into high quality water that can be reused in the process.
  3. Wastewater Recycling
  4. Ultra Pure Deionized Water: commonly used in electronic-related companies for rinsing processes, pharmaceutical manufacturing and others demanding high purity water. The company basically provides a rental and/or sale of portable ion-exchange resin columns and after sales support
  5. Cleaning chemicals
Financial Performance

  1. Gross profit margin declined while EBIT margin increased generally throughout the decade
  2. Number of shares issued increased due to equity financing in earlier years but have remained the same eversince
  3. Increase in dividend payment in 2008 is equivalent to the dilution of number of shares while dividend payment is generally in an upward trajectory from then on

  1. Working capital requirement has been decreasing throughout the years through better inventory management

  1. Capital expenditure is very volatile
  2. 2015 capital expenditure is believed to be a one-off major expenditure

  1. Company has been net-cash even during the Great Recession
Free cash flow projection
Assumptions
  1. Discount rate of 12.85% for taking higher-risk
  2. EBIT margin assumed to be at 20% forever (optimistic since this is the latest margin)
  3. Capital expenditure at 8% of revenue since this business seems more labor intensive (knowledge-based)
  4. Depreciation rate at 8% of property, plant and equipment 
  5. Supernormal growth rate of 15% annually for 5 years
  6. Terminal growth rate of 3.5% reflecting GDP Growth
  7. Revenue for the first year at Rm30 million which is close to its current revenue
Intrinsic Value
Intrinsic Value RM46350349
Intrinsic Value per Share RM0.18
Current Price RM0.33
Even with very rosy assumptions, the business is only worth slightly more than half of its current valuation now. The market is pricing an extremely rosy future for a very minimal prospective return despite the huge risk undertaken. Infact, any growth exceeding 15% will probably destroy value as the EBIT margin is not wide enough to sustain the capital expenditure and net working capital increment required for that kind of growth.
Sensitivity Analysis

Multiples

Conclusion
Although Brite-Tech Berhad has been producing positive profit for the past decade while increasing its rewards towards shareholders, the company is not immune to competition. For instance, there are more than 200 competitors within the same field with Salcon Group Berhad probably as the industry leader in this. Moreover, the company's performance grows in tandem with industrial developments' increasing demand for better environment management. As better environment management may incur additional cost in the short-run, the government may not impose stricter regulations especially during a period of pessimism among Malaysian manufacturers (Nikkei Manufacturing Index). Barring the presence of increased environmental regulation, the market is pricing a very rosy outlook for the business. Expectation it seems is way ahead of reality.


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