ORION (0079) - Orion IXL - run or punt?




Disclaimer: We are generally adverse to gambling on penny stocks but decided to put this out regardless for the readers to judge and make their own decisions. Strong disclaimer that this is NOT a buy recommendation. Please do your own research.

Orion IXL first caught our eyes when it came out as one of the most actively traded stocks back in 10 January 2017 with a whopping volume of 195 million shares. Our initial reaction has been like our reaction to most sudden jump in volume - i.e. "penny stock pump and dump". We however decided to quickly pull out its financials and were suprised to find that unlike most penny stocks, there could be some fundamentals in its financials. The Star Biz also wrote an article on Orion IXL and we will quote some of the facts provided in the article in our analysis below as well - https://www.thestar.com.my/business/business-news/2018/01/13/reset-at-orion-ixl/
This warranted some more research and here is what we found:
What We Like
  • Financials have never been more attractive 
    • Orion's financials are finalling turning to the black - with no suprises - the acquisition of ASAP. To put into context, Orion has not made a profit in 4 years! The acquisition of ASAP comes with a profit guarantee of RM7.5 mil per year. for 2 years This is against an acquisition price of RM73 mil - resulting in a PE of 10x which is quite reasonable for a "tech" related company. This is against Orion's original performance of an average of RM1 to RM2 mil of losses a year. 
    • Stronger balance sheet with effectively a "recapitalisation" of its balance sheet. It has RM5.5 mil of cash with little to no borrowings. 
  • Share price might have bottomed out in the previous months - Orion's share price have been lingering at around RM0.115 to RM0.12. That is the lowest level the share has been trading since the beginning - and this although its financials have been the most positive in its history. 
  • Unusually strong volume - the volume for the past week amounts to a total of 306 million shares. The 2nd highest volume in its history - and this includes the volumes during those sudden jumps to a high of RM0.70 - was only at 121 million shares. That is only 1/3 of the volume last week. Is something brewing? We wouldn't know for sure
  • Change of management - there has been a flurry of management changes since the acquisition of ASAP - Orion's new CEO is the CEO of ASAP. This could be a positive given that ASAP has been profit making for the past year's while Orion's existing management has struggled to turn the company around
  • ASAP appears to be a better business than the original biz of Orion. As quoted from The Star - "In general, both ASAP and Orion are primarily involved in the provision of software solutions for facility management services, though Orion liases with contractors while ASAP works directly with asset owners". The asset owners route appears to be working better than Orion's original business plan. Logically, asset owners have more incentive to use these softwares for their facility management services to extract more value from their assets
  • Liability of potential litigation against ASAP by Sporty Beans Sdn Bhd has been indemnified by the original shareholders of ASAP as extracted from a Bursa announcement - "The vendors of ASAP, namely Dato’ Paduka Mohamad Sharaff bin Haji Mohd Shariff, Prabuddha Kumar Pronob Chakravertty and Lilibeth Gamboa Belinario had on 28 July 2017 agreed to fully indemnify Orion against all claims, actions, damages, losses, liabilities, costs and expenses that Orion or ASAP may incur, suffer or be liable for in connection with the above case."
  • Shareholders? This point needs a more thorough research due to the following:
    • We can verify from the annual report that as of 31 March 2017, Mohamed Nizam Abdul Razak, the brother of Malaysia’s Prime Minister Datuk Seri Najib Razak, is a shareholder of Orion with a 3.34% stake. The Star reported that this has been diluted to 2% which could have been due to the rights issue - we were unable to confirm this from the disclosures to Bursa. As his holdings are below 5%, it should not fall under the substantial shareholders definition
    • The Star also reported that "ASM Mara Trust Management Bhd, which emerged with a 5.14% stake after it acquired 20.86 million shares on Oct 31, last year". If this is true, it would be a positive to Orion as the entry of what is effectively an institutional investor provides some stability to the company. That said, again we were unable to verify this from the disclosures of substantial shareholdings to Bursa.
What We Dislike
  • Penny stock connotation
  • No guarantee that it is not a pump-and-dump - this is partially offset by the somewhat "tame" rise in share price of approx 30% compared to other pump-and-dump instances. For e.g. the pump-and-dump case on Anzo where the price moved more than 2x in a very short time. 
  • Dependence on ASAP to perform - While the profit guarantee by ASAP is positive given that the original shareholders of ASAP has such a high confidence of ASAP, there is a risk on the financial performance when the profit guarantee ends after 2 years. While this is 2 years in the future, what the new Orion does in the 2 years matter to ensure that the financials doesn't plunge after the end of the profit guarantee.
  • Share volume has a history of drying up which could result in investors getting "trapped" - ie. Orion traded in a tight range of 0.12 to 0.13 from Sept 2017 to Dec 2018 with low volumes
  • Lack of tranparency over the change of management and leadership - there has been little communication from management to shareholders about the movements of key management
  • Volatile share price movement historically with strong price movements often followed-up by correction - we however find that these correction are often times justified as the previous strong postive price movements have little to no fundamentals - which warranted the correction
 

The above has been our findings. Run or Punt? Your decide.
Disclaimer: This is not a buy call. Please do your own research before investing.
Cheers,
Wiz_of_Finance
If you are interested in contacting me for more analysis, please contact me at wiz.of.finance@gmail.com

http://klse.i3investor.com/blogs/wiz_of_finance/144185.jsp