Thursday, May 25, 2006

Chat on Opcom Holdings

Here are some opinions which I hope are useful as some second opinion (my comments is in black).

Hi Moola,

Here are my opinions on OPCOM.

1. Management

  • Very "heavy" political background.
  • I don't like those types of companies. But from Opcom's operating history since it's listing, everything looks still promising.
  • If the management is honest as such, with it's "heavy" political background, should give positive impact to Opcom'' future growth.

a. Stocks with strong political background do have some risk. When they are politically in favour, then it bodes well for the stock. But do remember, this works both ways.

b. Opcom Holdings operating history. Opcom Holdings was listed in Dec 2003. Perhaps it is more prudent to look at what Opcom Holdings has done since listing.

fy 2004: Sales 58.084 million. Net profit 10.574 million.
fy 2005: Sales 78.291 million. Net profit 17.198 million.

The numbers looks impressive so far but remember Opcom is still relatively new and for some, they do reckon that it is way too early to pass judgement on Opcom with such few data.

And what do their current/trailing earnings suggest?

Sales 73.424 million. Net profit 13.599 million.

This is suggesting that Opcom current fiscal year won't be as happening as its 2005 fiscal year and it also suggest that perhaps Opcom's business is rather volatile.

c. Management? Some like to use how the management commentary after each quarterly earnings as an indicator to gauge their integrity, while some like to use interviews in the papers as an indicator. There is no real right or wrong since this issue represents one own perception.

Anyway, let's look at the early days for Opcom. Let's go back to May 2004.

Reporting Quarter: 2004 Q4 Earnings

On a Q-Q basis: sales went from 13.946 to 6.507 million.
On a Q-Q basis: net profit went from 2.958 million to 1.469 million.

Hardly impressive and in fact it is perhaps rather worrying. No?

here is what the company said in its earning notes...

  • For the current quarter, the Group achieved revenue of RM 6.5m and a profit before tax of RM 1.9m. On the year to date basis, the Group achieved a revenue of RM 58.1m representing a growth of 26% as compared to RM 46.0m in the preceding year. As a result of the higher revenue, the profit before taxation has also increased by 40% to RM 17.4m as compared to the preceding year of RM 12.4m. The growth was mainly due to the increase in demand and economies of scale.

    There was a decrease of 53% in the Group's revenue i.e. from RM 13.9m to RM 6.5m in the current quarter. The decrease was mainly due to the decrease in demand in the current quarter as compared with the significantly high demand in last quarter.

    However, the Group's profit before taxation has only decreased by 34% i.e. from RM 2.9m to RM 1.9m in the current quarter. The steady profit before taxation despite low revenue was mainly due to decrease in administrative expenses.

Decent explainations but there is a slight problem here. Now each Mess-daq company are required to write a research note describing the company's performance and prospect.

Take a look at the following: Opcom Holdings Berhad Research Report. In that link there's a pdf file attachment. Have a read.

How? Do you see how the management totally ignored the current reported quarterly earnings? And it made NO effort in describing the POOR QUARTERLY EARNINGS. Instead, the company posted its nice track record which is really irrelevant since it represented a period when Opcom was NOT listed in the exchange. Everything was presented in a nice table, and it showed off its growth thingy and talked about irrelevant yardsticks such as EBITDA, its EBITDA margin, its EBITDA growth....

So how? How would u rate such a company management?

2. Product portfolio

  • It's core biz is producing fiber optics as the backbone for broandband, 3G, mainly on ICT.
  • In Malaysia, this biz future looks bright as the penetration rate still low and has big room to growth. But, I have no idea how many fiber optics players are they in Malaysia, and what are the competitive advantages of Opcom.

Way back in 2003, there was this commentary from this independant advisor, Surf 88.

  • More than 60% domestic market share. On the back of the indirect contract with Telekom, Opcom has emerged as the major supplier of Telekom’s fibre optic cables requirement, so much so that it is estimated to have supplied 65%-75% of domestic telecommunication needs in the past five years. To some extent, this has ‘crowded out’ the other two major players, Leader Optic Fibre Cable Sdn Bhd, a subsidiary of Leader Universal (RM0.61, stock code 4529) and Fujikura Federal Cables Sdn Bhd. In turn, Telekom accounted for 98.3% of Opcom’s revenue in the latest six months to Sep 2003.

Two issues from that paragraph.

1. There are two competitors. Leader Optic Fibre cables and Fujikura Federal Cables..
2. Opcom's (who controls 60% market share) main source of revenue is Telekom.

How would you rate such a business economics?

Opcom has to challenge two other players in the market for its bread and butter.

Customer Based

  • Secured RM171.4mil contract from TM, last until 1Q 2007. Est. yearly revenue = RM 60mil.
  • New contract from TM, 3 years from 9/11/05 – 8/11/08, worth RM 17.3 mil, or RM 5.8mil/year.
  • RM 2.5mil from TNB, dated 28/2/06, end supply by end 2006.
  • 18/4/06, RM16mil contract from Multinet Pakistan, supply end 2006.
  • Agreement with Erricson & Maxis, but no commitment on revenue.
  • Others overseas customers, which Opcom claims.

Ys, Opcom is making an effort to correct its single customer business structure.

Financial aspects

  • Strong earning & growth since listed until 2005.
  • Net cash position, FY2005 Net Asset Cash Value (NACV) at RM0.35 per share.
  • High profit margin & improving (until FY2005)
  • Good DY to reward shareholders

Opcom reported its 2006 Q4 quarterly earnings and it was a pretty horror showing, which paints a totally new picture on how Opcom has done since its listing.

  • fy 2004: Sales 58.084 million. Net profit 10.574 million.
  • fy 2005: Sales 78.291 million. Net profit 17.198 million.
  • fy 2006: Sales 67.795 million. Net profit 10.866 million.

Which seriously questions the issue of strong earning & growth since listed until 2005!

And this is what the company had to say.

  • For the quarter under review, the Group registered a revenue of RM6.8m and profit before taxation of RM1.2m as compared to RM12.4m and RM2.6m respectively in the preceding year's corresponding quarter. The lower revenue and profit before taxation recorded by the Group were mainly due to lower sales of fiber optic cables compared to the preceding year's corresponding quarter.

Satisfactory answer for the poor result? If no, remember the issue of management integrity?

Doubts:

  • Why Opcom still owing it's director since it can actually pay off the debts at any time?
  • What is Minority Shareholders' Interest? Why keep on increasing? Will this give negetive impact to Opcom?
  • Director's remuneration & fees increased from RM 235,500 to RM 766,094. What will it be in FY2006? Especially for the two key persons…

Minority interest is quite simple actually. Say Opcom owns quite substantial shares in a company called PoPo. And Opcom shareholding in it is only 70%. 30% belongs to someone else. Now if PoPo directly contributes to Opcom's business earnings, for accounting purposes, Opcom has to account for that 30% interest in PoPo which doesn't belong to it. So, Opcom has to minus the amount from the profits. So why does this amount keep increasing? Simple reason is PoPo is adding more earnings to Opcom's bottomline.

Concerns

  • Opcom currently too depends on TM.
  • Decreased in EPS, profit margin for cumulative 3Q 2006. How far will this goes…??
  • Engage with Erricson to provide Opcom technology transfer. How much will it cost and how much profit can it contribute to Opcom..???

The decrease in EPS is a serious issue isn't it? And yesterday's quarterly earnings confirms the issue.

Buying points:

Relatively low PE. Based on annualized EPS FY06, it is trading at 6.7 times.

Estimated revenue for FY07:

  • TM contract on 7/2/04, ended 6/2/07 = RM 60mil/year
  • TM contract on 9/11/05, ended 8/11/08 = RM 5.77mil/year
  • TNB contract on 28/2/06 = RM 2.5mil/year
  • Multinet contract on 18/4/06 = RM 16mil/year
  • Others = RM 18mil (by deducting RM60mil TM contract from FY05 revenue of RM78mil)
  • Total estimated Revenue FY07: RM 102.27 mil.
  • Assumed 17% net profit: RM17.38mil. > EPS: 13.47, PE: 5.4

But, after FY07, when the biggest contract from TM end…. ???

Hope these second opinions helps.

Cheers!

2 comments:

hhc1977 said...

nm,

Exactly. If u look at its price chart, opcom tells u everything u need to know about this company future.

Out from many shares from BSKL, very few are investable....

John said...

Hi Moola,

Thanks for your thoughts. It really helps. Now I am clear with my direction.

I really like your point of view... hope you can share more for time to time.

Cheers!