Every time we come across a technology services, I have to make sure that its not just another plug and play company, or a purely systems integration services company.
At a glance, EA may look like the usual technology services company. In fact it is very much product driven. EA Holdings' wholly‐owned unit EASS Sdn Bhd was granted bumiputera contractor status by the ministry of finance in 2007. This status allows EASS to bid for tenders reserved for bumiputera companies, giving it a foothold in the lucrative government‐linked companies sector. This unit basically anchors the company's bread and butter revenue stream.
The second unit of the company is Concorde MSC, a provider of IT solutions for financial services sector. Reading that would make most of us fall asleep. They are adept at developing bank wide data warehousing, automating central bank reporting, implementing Basel II data marts and risk calculators, and implementing risk management and CRM.
Concorde MSC has been servicing numerous banking clients already as some of the senior team members were originally from Silverlake, a highly recognised IT solutions player in Asia Pacific. The 'bankability' of this team within the financial sector should not be under estimated.
The third prong is EA MSC which is in RFID. There is RFID and there is RFID. Most of the RFID in other listed firms like CBS Tech is about 2-3 years behind the curve. I happen to know a bit about RFID and EA MSC has its own product and patent pending as well. Theirs is in active RFID while most are still toying with passive RFID.
One of its edge is in using wireless mesh networking which save a lot on implementation costing as there is no complicated communication wiring. The bulk of the revenue comes from their popular Rain Tag which is the long range active tag. The kicker is the soon to be launched RTLS or Real Time Location System, Quatis. The product was a big hit at the recent Security Expo at KLCC.
The beauty of RTLS is that the tags are aware of its own location and its location can be tracked and logged in real time. There are competing products in RTLS internationally such as Radianse, WhereNet, PanGo and AeroScout. Quatis has a real difference, thanks to its IP. This translates into a much lower cost per standard tag. Quatis cost is about one third the average cost of the same tags under the earlier mentioned international names.
The cost factor is a significant factor as the implementation cost and tag/reader costs inhibits the "return on investment" hurdle for many businesses. This advantage will put Quatis on a highly competitive platform.
The lack of standardizing various protocols used for communication between the RFID systems and the back-end systems such as the Enterprise Resource Planning (ERP) system, Warehouse Management System (WMS) system have hindered a wider acceptance of active RFID. EA MSC technology platform conforms to IEEE 802.15.4 standards and is more widely accepted to most existing equipments.
RTLS serves in operational areas for logistics and other services, as e.g. stock grounds or storehouses, and for servicing areas in clinics and industrial plants
- to combine identity and location of any type of items or objects
- to combine identity of items with location of lifter placing the items
- to ensure permanent availability of proper information about temporary placement
- to support notification of placing of items
- to prove proper manning of operational areas
- to prove consequent evacuation of endangered areas
- to make marshalling staff dispensable
- etc.
I can see Quatis contributing significantly to EAH's bottom line as it is due to be launched in 3Q2010. Its basically an asset location tracker and has enormous potential in security-safety-asset protection businesses.
For financial year 2009, EA's net profit surged 87.2 per cent to RM3.64 million compared with RM1.94 million in 2008. EA reported its 1Q2010 results recently and registered a net profit of RM1.39 million and a revenue of RM5.43 million. Annualising that the 2010 PAT should come to RM5.56m, a 52.7% jump from 2009. That translates to a net EPS of 3.5 sen.
Looking at growth companies, the attraction is to look at their net margins and how sustainable they are. For the 1Q2010 figures, the ICT Services unit registered a net of RM86,000 on RM1.091m revenue or a net margin of 7.8%. Software and banking solutions unit posted a net of RM367,000 on RM1.501m revenue or a net margin of 24.4%. RFID and access control systems saw a net of RM942,000 on revenue of RM2.846m or a net margin of 33%.
The ICT side is bound to have smaller margins as it is in a competitive arena. The other two are more attractive and the strong margins are indicative of the edge in deliverables. I expect the company to be on an exponential growth path for at least the next 3 years, which is why I consider the company listing itself a tad too early, giving rise to significant under valuation. They can manage to sustain such strong margins owing to "in house expertise in software banking solutions" and "own patent-pending products in RFID".
Unlike a number of "growth companies", EA does not have a "burn rate" as their products and services are gaining traction already. That is, EA is going to be building equity rather than burning their proceeds - which may explain why many Mesdaq companies find themselves in financial dire straits after a couple of years of being listed.
The bare facts to me is that the company kind of went for its IPO a year too early as I am sure it could get much higher pricing for its IPO if it was listed 6-12 months later, possibly doubling its IPO price. Its over subscription for the public portion was a healthy 19.4x.
Having said that, and judging by its good 1Q2010, the company is on a strong growth track. Its on track to make PAT of RM5.56m this year with a very good chance of hitting even RM7 or RM8m if Quatis is rolled out on time.
This should bring about a fair valuation of between 45 sen to 65 sen depending on how optimistic you want to be.
NOTE: The above opinion is not an invitation to buy or sell. It serves as a blogging activity of my investing thoughts and ideas, this does not represent an investment advisory service as I charge no subscription or management fees (donations are welcomed though). The content on this site is provided as general information only and should not be taken as investment advice. The author may have bought shares in the company already. All site content, shall not be construed as a recommendation to buy or sell any security or financial instrument. The ideas expressed are solely the opinions of the author. Any action that you take as a result of information, analysis, or commentary on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.
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