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Elsoft Research Berhad is involved in research, design and development of automated test equipment (ATE) and burn-in systems and application specific embedded systems for the semiconductor industries. They also have a 30.91% stake in Entopia, the butterfly farm in Penang.
Their primary markets are automotive, smart devices and general lighting industries.
Elsoft has a lean workforce. It is manned by 79 employees in different areas.
Significant amount of sales and purchase are overseas which is denominated in USD. Exchange rate fluctuation of USD against MYR may influence the group’s financial results. Since both sales and purchase are in the same currency, the exchange risk is partially mitigated because of the natural hedge.
Elsoft’s top customer is a lighting solutions MNC which accounted for 75% of the group’s total turnover for FY2018. However, this customer has been with the group for more than 15 years which indicates a long term stable relationship.
 

Future Prospect

The group is expecting weaker demand for ATE in the beginning of 2019 and recover in 2nd half of 2019.
Elsoft is undergoing continuous R&D focusing on improving existing products and developing new products for customers.
Their current areas of interest in R&D are mainly in:
  • ATE for infrared/laser devices testing
  • Next generation ATE for smart devices industry
New ATE for automotive industry
 

Income Statement

Financial Year
12/31/2018
12/31/2017
12/31/2016
12/31/2015
12/31/2014
Sales/Revenue
78,150
64,348
63,613
49,741
45,143
Net Income Avail to Common Sh.
39,917
29,835
31,103
26,045
20,133
Profit Margin
51.08%
46.36%
48.89%
52.36%
44.60%
Elsoft stated that their R&D efforts in FY2017 successfully converted into revenue for FY2018. Revenue has increased by 26.5% for FY2018, driven by high demand from smart devices industry. Profit margin went up due to large scale production improving the economies of scale.
In the 4th quarter of FY2018, production activities were slowed down to give opportunity for the group to ramp up R&D activities in new test application for infrared/laser devices, automotive headlamp and next generation LED flash.
Administration expenses decreased slightly by 1.4% despite incurring more in staff cost and corporate exercise in FY2018. This is due to no one-off expenses such as impairment of other receivables and additional factory assessment raised which happened in FY2017.
 

Balance Sheet

Financial Year
12/31/2018
12/31/2017
12/31/2016
12/31/2015
12/31/2014
Cash & Short-Term Investments
72,479
54,054
45,078
30,605
32,338
Cash Only
10,187
12,501
11,192
14,684
12,812
Total Current Assets (TCA)
92,467
81,292
73,013
53,677
48,937
Total Non-Current Assets (TNCA)
37,080
38,018
38,576
39,424
32,322
Total Assets (TA)
129,547
119,309
111,589
93,101
81,260
Total Current Liabilities (TCL)
15,978
11,293
12,782
9,271
7,150
Total Non-Current Liabilities (TNCL)
638
600
588
571
525
Total Liabilities (TL)
16,616
11,893
13,370
9,843
7,675
Shareholders’ Equity (TSE)
129,547
107,416
98,219
83,258
73,585
Elsoft cash position was reduced in FY2018 due to higher placement in money market fund for greater after tax return.
The group remains in net cash position with no debt.
 

Financial Ratios

Financial Year
12/31/2018
12/31/2017
12/31/2016
12/31/2015
12/31/2014
ROE
33.56%
29.02%
34.28%
33.21%
29.98%
ROCE
72.02%
56.03%
58.80%
55.47%
54.66%
EPS
6.00
4.48
4.67
3.91
3.03
DPS
4.58
3.33
2.50
2.22
1.94
Book Value
0.20
0.16
0.15
0.12
0.11
DPR
76.33%
74.33%
53.53%
56.78%
64.03%
With all the numbers in the income statement and balance sheet in place, the financial ratios can give us an indication of how healthy is this company.
ROE average at 32.01% for the past 5 years. For FY2018, the group recorded 36.21%.
Since more than half of shareholder’s equity is cash and investments, the ROCE of the group is significantly more than ROE. For FY2018, the ROE reached to its highest at 72.02%. This means the company is able to make RM72.02 using its current working capital.
EPS, DPS and book value has increased consistently for the past 5 years along with growing revenues and profit.
 

Valuation

Current Price
0.89
Dividend Yield
5.15%
P/E Ratio
14.83
P/B Ratio
4.55
At the time of writing (5/5/2019), ELSOFT is selling at market price of RM0.89.

I wrote this post more than 2 months ago and only decided to upload it now because I have so many other nice posts (in my opinion) lined up.
I also noticed that I am writing less stock analysis as of late and wrote more about ideas on personal finances. It’s one of the topics that I like to talk about too.
If any suggestions or ideas you want me to write about, feel free to let me know.
I hope this post helped you in some way. If you like this post, you might like similar posts that I have written previously. Click here to read them.
 

Disclaimer

The writer of this analysis may have direct interest to this stock. You can check out his portfolio here to verify.
This post is intended for education and entertainment purpose only. It is not a recommendation to buy, hold or sell. If you decide to act on the information shared, The Stockmonger will not be liable for any losses incurred. At the same time, we will not ask for compensation in any form if you make profits.

https://thestockmonger.com/elsoft-rising-tech-company-with-a-butterfly-farm/
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