Buying IRIS (Oh, I've Lost My Mind)

Never in my life would I think I would be writing about Iris. Have blasted the shares to smithereens when it was manipulated to an abusive level. Isn't it refreshing not to hear anything from the company's PR machinery. However, there have been a few developments which has piqued my interest in Iris. Everybody would want to know, would Iris be around in 2 years time, when will the company go into PN17, will there be more skeletons i the company's closet!!!

June 4, 2008 - Iris Corporation Bhd has terminated a collaboration agreement with IBM Malaysia that relates to the provision of services by IBM Malaysia for use by Iris in IBM’s manufacturing facility in the United States. Iris said the agreement, known as Base Agreement 2, was terminated by mutual consent effective May 31. “To date, Iris has yet to secure a significant project in the US trusted identity sector and the termination of the Base Agreement 2 would enable Iris to reduce its cost in operating a manufacturing facility in the US,” it said. The Base Agreement 2 was signed on March 28, 2007. Iris signed another two agreements with IBM on the same day — a non-binding memorandum of understanding for strategic collaboration with IBM USA, and an agreement (Base Agreement 1) that says that IBM USA would provide financing to Iris for the installation of equipment and a manufacturing facility for the production of electronic passport inlays and chip cards. Notably, Base Agreement 1 and 2 were signed to facilitate the MoU. With the termination of Base Agreement 2, it is not known if Iris’ MoU with IBM USA remains intact.

Ratings Agency Malaysia has reaffirmed the 3 bond issues on Iris in its latest newsletter(30 June 2008) :
a) An A3 rating of Iris Corp Bhd's RM135m Bai` Bithaman Ajil Debt Securities (2003/2010)
b) An A3 rating of the RM60m Islamic Debt Securities (2003/2010) issued by Iris Technologies (wholly owned subsidiary)
c) An A3/P2 rating on Iris Technologies's RM40m Murabahah CP/Medium Term Notes (2004/2011) RAM maintains a negative outlook on all 3 papers.
Things are coming to a crunch with these papers due in 2010 and 2011.

Corporate Movements:

Sep 2007: Received RM27.28m from a share placement exercise

May 2008: Received approval from SC for another share placement exercise

In the meantime, the company has secured bondholders approval for the proposed sale of Iris Smart Complex which is expected to net RM76m. Apparently they have managed to sell and leaseback the complex to Mapletree Industrial Fund - actual terms not disclosed as yet. Hence they should be able to muster up a cash balance of RM100m to alleviate short term liquidity problems. The question is how long can the RM100m lasts? What's next?

Results: Gearing for the company has been brought down from 1.01x in Dec 2006 to 0.74x for Dec 2007. Revenue declined 6.5% year on year in 2007.

Real Business: I prefer the Iris now than the PR machinery in the past and being the manipulative share ramping toy for certain bigwigs. The company has probably been told to "tone down" and just do its business. Last year Iris has managed to secure new projects from Senegal, Bahamas and Cambodia. It has also started work on the Nigeria's project. The IBM deal looks to be down the drain for now. Iris has quite a bit of country risk with the projects it has been securing, but thats part and parcel of the product, which is slated to help upgrade the countries with out dated technologies. You cannot expect Iris to sell its product to Australia or NZ. It is also interesting to note that Iris has just incorporated a company in Egypt - possibly ahead of securing another contract.

Condensed Consolidated Income Statement

For the first quarter ended 31^st March 2008

	Individual			Cumulative
	3 months ended			3 months ended
	31st March 2008	31st March 2007		31st March 2008	31st March 2007
	RM’000	RM’000		RM’000	RM’000
Revenue	58,942	52,897		58,942	52,897
Cost of sales	(40,599)	(34,814)		(40,599)	(34,814)
Depreciation and amortization	(3,512)	(2,973)		(3,512)	(2,973)
Gross profit	14,831	6,087		14,831	6,087
Other income	(79)	1,533		(79)	1,533
Operating expenses	(7,988)	(5,740)		(7,988)	(5,740)
Depreciation and amortization	(790)	(746)		(790)	(746)
Interest expenses	(3,722)	(4,154)		(3,722)	(4,154)
Share of profit / (loss) of associated companies	105	(228)		105	(228)
Profit before taxation	2,357	(3,248)		2,357	(3,248)
Tax expense	(986)	(4)		(986)	(4)
Profit after taxation	1,371	(3,252)		1,371	(3,252)
Attributable to:
Equity holders of the Company	1,371	(3,188)		1,371	(3,188)
Minority Interest	-	(64)		-	(64)
	1,371	(3,252)		1,371	(3,252)
Earnings per ordinary share attributable to equity holders of the Company:
Basic (Sen)	0.10	(0.28)		0.10	(0.28)
Diluted (Sen)	0.10	(0.24)		0.10	(0.24)

Condensed Consolidated Balance Sheet

As at 31^st March 2008

		31st March 2008 RM’000		31st December 2007 RM’000
Non current assets
Concession assets		13,951		15,798
Property, plant and equipment		101,620		104,422
Prepaid land lease payments		6,165		6,268
Research & development		10,787		10,278
Intangible assets		15,333		15,678
Goodwill on consolidation		134,126		134,126
Investment in associated company		6,297		6,221
Other investments		406		406
		288,685		293,198
Current assets
Contract work in progress		15,096		14,636
Inventories		83,376		75,714
Trade receivables		93,376		86,408
Others receivables & deposits		28,696		29,615
Cash and cash equivalents		22,967		27,948
		243,511		234,321
Current liabilities
Trade payables		35,035		28,631
Other payables		24,389		26,747
Hire purchase & lease payables		6,271		6,215
Short term borrowings		32,791		32,987
Bonds		25,000		25,000
		123,486		119,580
Net current assets		120,025		114,741
		408,710		407,939

Condensed Consolidated Balance Sheet

As at 31^st March 2008

(continued)

		31st March 2008 RM’000		31st December 2007 RM’000
Financed by:
Capital and reserves
Share capital		216,416		216,416
Reserves		52,170		50,799
Total equity		268,586		267,215
Non current liabilities
Hire purchase & lease payables		6,050		7,630
Other payables		2,738		2,738
Bonds		125,000		125,000
Deferred taxation		6,336		5,356
		408,710		407,939
Net assets per share attributable to equity holders of the Company (RM)		0.20		0.21

ITS A BUY NOW

1) The PBT was a good sign. Hawks will be circling the significant Receivables figure, but I would give Iris some leeway here as they are doing business with a number of emerging countries. Now that we have cleared the mess surrounding the "share manipulation", Iris is one of the better Mesdaq companies, it has a real patented technology, and not like most Mesdaq companies which are technology adaptors but not patent holders.

2) There is now a good spread of contracts and in these kind of work, the more projects you secure, the easier it is to sell to other countries. Its a cumulative thing. The acceptance makes it an easier sell.

3) At 11 sen on share cap of 1.209bn, it has a market cap of just RM133m. for a company with a real patented technology that has done good work and secured new contracts, its a steal. The recent share placement was done at 15 sen, to buy at current levels would be another steal. I believe that Iris would get a huge re-rating once more and more details of the "fresh fundamentals" are made known to the investing public. Its not easy to resuscitate something that had been declared as DOA a year ago. It will be a gradual re-rating upwards.

4) Its a tech company, don't look at real assets backing.

5) Iris has just filed a big claims case against Fulcrum It Services and 3M Rochford Thomson in the US for infringing on Iris' patented technologies. Iris alleges that the companies have infringed certain claims of US Pat. No. 6,041412 entitled "Apparatus and Method for Providing Access To Secure Data or Area" by using secure electronic passport readers and having these manufactured and installed in the US. The defendant's motion to dismiss for lack of standing has been denied. The case highlights that there could be a windfall if Iris is successful in its claims. More importantly, it highlights that the patent of Iris is "highly useful and has strong commercial value".

http://rapidshare.com/files/134703932/IRIS_vs_US.pdf.html

6) I cannot even put a fair value on the stock, but 11 or 12 sen is just too cheap looking from the turnaround angle. However 20 sen for the stock is a no-brainer. in fact, the longer it stays below 15 sen, I strongly suspect a number of Private Equity firms will be very eager to privatise the company for around 20-25 sen. If the company is able to improve the collection of receivables down to RM50m, the share price can even go back above 30 sen.

p/s photo: Nadia Chan Chung Ling