Mems: Part V

Ahh... Ze never-ending saga?

Here is Part V: The chronicals of Mems and CIMB.

As mentioned earlier, CIMB was rather very bullish about Mems and its growth prospects. In their very detailed IPO notes on Mems, CIMB said the following:

There are no comparables for Memstech on the Bursa Malaysia and this region. Only France’s Memscap is comparable but it is loss making. Hence, we believe Memstech should be considered and valued as a rapidly-growing technology company.... Hence, we think it is fair to value Memstech in line with Redtone, which we value based on 14x CY05 PER. Attaching a similar multiple of 14x to CY05 PER (average of FY05 and FY06), we arrive at a target price of RM2.00 for Memstech.

And as mentioned ealier, Mems closed at a remarkable 1.65 on its maiden trading day. Truly remarkable considering that its ipo price was a mere 0.62.

With CIMb assigning a fair value of rm2.00 for Mems, who is to complain? The speculator or the punters? The ipo investors?

Do you reckon they will complain about the overly optimistic earnings projections CIMB wrote on Mems?

No way Jose.... tiok boh?

What to complain? It was Moola, Moola, Moola and lots of Moola in a rich man's world!

That was in Aug 2004.

Came December 2004. Mems fy 2005 Q1 earnings.

Quarterly rpt on consolidated results for the financial period ended 31/10/2004

1. Sales 12.037 million.
2. Net Profit 3.119 million. (margin 25.9%)

CIMB wrote the following comments on Mems:

1QFY05 net profit jumped 33% q-o-q, and when annualised is only 33% of CIMBS’ FY05 forecast. The results are still within our expectation as we expect a surge in Memstech’s 3QFY05 (quarter ending April 05) profitability when we anticipate the company to begin production of potential contracts that are currently in the final evaluation by potential customers.

See onot? They realised that Mems performance, which on a standalone was very decent, cos it achieved a 33% q-q growth... but then... they were caught rather naked... cos based on an annualised basis, Mems is underperforming CIMB's expectation by some 33%!!

CIMB then fast-fast tried to explain the shortfall:

The key attraction to Memstech is several sizeable potential contracts for silicon microphones for two Japanese customers, fuel pressure sensors for a major automobile group and blood pressure sensors for several customers. Our forecast captures the bulk of these potential contracts. According to Memstech’s release to the BMSB, “The Group has successfully developed the 2G dual axis accelerometers, integrated pressure sensors and silicon microphone for consumer electronic applications. These products are in the final stages of qualification by various potential customers and we expect volume commercial production to commence in 3QFY05. In addition, the Group has also successfully developed pressure sensors for the automotive industry and is expecting to commence commercial production in the 4QFY05.” December and January are crucial months as the results of its qualifications by customers will be made known. We believe any confirmation of these potential contracts should help re-rate the stock.

Yup... so discounting the potential embarressment, CIMB still had a OUTperform rating on Mems.

18th Jan 2005.

CIMB wrote again.

Mems is now 2.03 (wahh... what u know... see... u see... Mems achieved CIMB's target price mah... baru in Aug 2004 listed...now Jan 2005... Mems oredi achieve CIMB's target price of 2.00 wor... soooo.... how dun simply-simply tok bad hor!)

and.... CIMB gave a new target price of..... ahem..... rm3.30 for Mems.

An upside potential of 63%!

Shocking?

IPO price was some 0.62 a few months ago. Price now 2.00. Not enough wor. They want 3.30 wor!

Anyway this is what CIMB wrote...

A new potential customer, a leading producer of injection-molded disposable medical devices, will be auditing its production facility before Chinese New Year to source blood pressure sensors. If everything goes well, we expect this to crystalise into orders in March or April. Neither the volumes nor value of this potential contract are known at this stage. (hhmm .. volume nor value of potential not known wor!! how?)

We are slashing our FY05 net profit estimates by 35%, but raising FY06 and FY07 net profit forecast by 7% and 11% to factor in delays in production of the silicon microphones for FY05 and partially for FY06, but include sales of infrared cameras which should kick-in from 2QFY05.

We are raising Memstech’s end CY05 target price from RM3.10 to RM3.30, in line with our FY06 and FY07 net profit upgrades, and based on an unchanged 11.2x CY06 EPS. Maintain OUTPERFORM. Memstech has re-rated 30% and outperformed the KLCI by 19% in the past 3 months. We believe this is on expectations of potential contracts for silicon microphones and fuel pressure sensors. A further re-rating in share price will likely be from: i) the securing of the above contracts, and ii) quarterly profits to rise, in our opinion.

Ahh..... u see? u see? remember Mems only reported a net earnings of rm3.119 million for fy 2005 Q1 and based on an annualised basis, Mems 'could' be earning roughly some 12.4 million net profit only for fy 2005. As you and I know, 12.4 million is very far from the initial CIMB estimate of some 37 million.

Which is why CIMB is lowering their expected earnings for Mems fy 2005 from 37 million to 24.7 million.

24.7 mil? Just for the record, Mems only did 13.7 mil!! So despite lowering their estimates by so much, Mems still missed CIMB's estimates!!

And consider this, CIMB lowered their earnings expectations by 35%. Err... would i be wrong if i word it as 'Downgraded earnings expectations by 35%'?

And here is the interesting curve ball thrown by this CIMB writer.

So fy 2005 earnings estimates is lowered by some 35%.... this bugger then raised it's fy 2006 and fy 2007 earnings estimate by some 7% and 11%.

Well 7% and 11% sounds pretty innocent but if one put in the actual figures, CIMB is estimating a net profit of 96.6 and 98.3 million for Mems fy 2006 and fy 2007.

96.6 million wor.

Now isn't this simply way too optimistic?

And then remember the issue they made about unknown volume and unknown value of potential?

Look at what Mems earned for fy 2005: 13.706 million only.
And the first quarter of fy 2006, Mems only managed a net profit of only 3.009 million.
At such rate, Mems annualised net earnings for fy 2006, would be around 12 million or so.

And CIMB's estimate? rm96.6 million!!!

Can 13.7 zoom to 96.6???

Now is this sibeh geng or what?