A Thematic Hidden Champion You That Has Enormous Upside!!
Investor’s preference had once again back to the long-term-winner theme – technology board. Stocks like VS and UWC both had announced their quarterly report yesterday and I must say, the results are very promising and foreshadows a great upside ahead for the sector.
However, being manufacturers always have the capacity limit and shipment problem. Fortunately, this hidden champion that we are sharing today does not limit itself in the manufacturing field – but instead, is a very promising software company with extremely low valuation – ARB BERHAD (KLSE:ARBB).
As broad as the technology already is – it is also extremely wide for the software sub-segment itself. So, what does ARBB do?
ARBB principally involved in Enterprise Resources Planning (ERP) and Internet of Things (IoT) software development, customization, and implementation. With digitization getting on track, businesses that are unable to utilize data are losing track of costs, profits and inefficiencies, and worst of all, might see diminishing market share as their competitor are improving.
Technically, businesses need ERP system – sooner or later.
The Malaysian ERP landscape is not saturated but dominated by a few of the big names, such as SAP, Oracle and NetSuite, Microsoft, Infor, and IFS. Do not get me wrong but ERP are not cheap, based on 2019’s market research, a basic implementation of ERP could easily cost approximately USD 100,000 to USD 150,000 – and this is only the baseline of it.
Why does it cost so much?
With big names dominating the industry, it is not a wonder why ERP is being “manipulated”. However, we understand that ARBB does the design and develop cloud ERP system for their clients while offering an extremely low entry point for them. ARBB could profit from several aspects after the implementation of the software.
Addon costs for unique function or API.
Provision of support, troubleshooting and cloud services.
Data management and advisory.
The edge of ARBB is definitely on the pricing end and down-to-earth application as the business itself is localized. However, ARBB might not be as “famous” as the big names, but judging from the revenue growth, It is pretty obvious that the company is gaining traction.
A five-year study on the company’s past performance would note that ARBB had a revenue CAGR of 58%. We were not able to derive the CAGR for profit after tax due to financial year 2016 was in a loss. But you get the idea when a company turned around from making 16 million losses per year to 42 million in profit after tax in 5 years.
Obviously, ARBB’s growth was outstanding, and it surpasses majority of the industry, and belong to the far-end of a bell graph on the high growing side.
As for the IoT segment for the company, the company had 3 sub-division, namely Smart Building, Smart Home and Smart Water Supply Management Solutions. Some of you might not be aware, but more and more developers are adding the “Smart Home”, a.k.a. voice-controlled electronics as a unique selling point for properties.
Well, ARBB definitely could do that, but it is not that shallow. In the Smart Building sub-division, the company provide engineering, procurement, commissioning (EPC) services to property developer and contractor. The company also helps to integrate automated systems for smart buildings, like installing wire, wireless and mechatronic works.
A Smart Home concept is even more straightforward. For simplicity’s sake, a Smart Home features the ability to have a centralized and remove monitoring and control over electronic appliances, which could be further integrated into your phone’s app. And lastly, the ARBB Smart Water Supply Management Solution provides holistic management on software, hardware of water metering system, and provides data analysis on billing, consumption analysis, maintenance cycle and so forth.
Technically, ARBB could collaborate with GKENT on water metering business.
Some notable developments of the company are:
- A Joint Venture with Orange Social Media Sdn Bhd. (ERP)
- A business development contract of USD 20 million with Tatan Land Co Ltd. (ERP)
- A MoA with Shuifa IoT Tech Co Ltd for 600 million worth of smart house water filtration system.
- A solar project with University Sains Malaysia to install, operate and manage < 1 MW solar photovoltaic system.
- Business contract with IJ Ventures Sdn Bhd for contract value of 18 million.
- LOA from AGES for IoT SEPCM project for 260 units of services apartment for total contract value of 60 million.
- Joint Venture agreement with Perkasa Selalu Sdn Bhd for IoT SEPCM project for 78 million.
It looks good on the business perspective as well as the financial calculations. But how about the underlying assets and liabilities?
Technically, all debt indicators are not applicable to ARBB due to its debt free nature. Based on the current price of 29 cents per share, the company arrives at a market cap of 176 million, with net cash of 57 million. A quick enterprise value calculation would put ARBB to approximately 119 million in value.
I had run multiple simulations on the expected earnings and EV/EBITDA valuation, and none of them actually surpasses the 5 times mark. How is it possible that a company with great business, great earnings but terrible pricing by the market?
Certainly, the market had overlooked this hidden champion.
I have come to note that there are ill-intentioned individuals or PAC trying to defame the company and drive the share price flat, or down. These people are considered as “operator” in the market and was not penalized due to their anonymous nature. However, I think a good company certainly do not deserve the treatment from the investment community.
Based on my rough calculation on EV/EBITDA based on 30 million conservative EBITDA per annum, here is the expected outcome of ARBB’s share price “theoretical” performance.
Current valuation dated 16th June 2021 – 3.9 times.
8 times EV/EBITDA – 250 million market cap (39 cents)
10 times EV/EBITDA – 300 million market cap (49 cents)
12 times EV/EBITDA – 360 million market cap (59 cents)
Theoretically, every 2 times increase in EV/EBITDA – which is purely investor’s sentiment would result in 10 cents higher in ARBB’s share price. Sadly, the company is trading at 29 cents at the very moment. A very conservative idea of 39 cents would result in 34% in ROI, and based on historical share price performance, 39 cents is definitely achievable, not to mention ARBB is currently a laggard behind the technology sector.
This led me wonder, when would ARBB truly freed from the curse of undervalued? But from an investor’s point of view, the current pricing is definitely CHEAP and SAFE to enter!!