Is Smartag Worth A Bet?

Posted on Tuesday: ACE Market: Same Old, Same Old Issue. In that posting, I highlighted six of the new ACEs in the ACE Market.

We all know and read about McLean and THAT

Let's look at Smartag. This one is rather very interesting because it was mentioned as a company getting a slice of the ETP projects.

The retail IPO price for Smartag was 31 sen. Stock closed yesterday at 28 sen - down close to 10% from its IPO price.

With the stock getting a slice of the ETP, what gives? Look at the chart above. One does not have to be a rocket scientist but that's clearly a chart of a stock in a strong downtrend at this moment of time.

** Ah... at this moment of time... is crucial. Stock charts changes all the time. And mind you, stock fundamentals changes too! Some very slow but some stock fundamentals could really change overnight! Anyway... at this moment of time.. that's a stock with a serious downtrend but needless to say the downtrend might not be permanent and it could change for the better - yes let's be mature about it and acknowledge this fact first. **

So why the stock like this one?

Is the investing public missing out on something?

Or is there a reason why the stock is trading so badly?

Yes, could this be a hidden gem, the ACE in the ACE market or could this just be a potential bad apple?

Now of the things that is useful is the IPO coverage of the stock.

And for the case of Smartag, KN covered this stock.

Here's the copy.

Quote:

• Smartag is a provider of total Radio Frequency Identification (RFID) based solutions for potential clients that seek to optimise their business process and data flow using RFID technology. We like the company’s impressive net margin of more than 40% and expect such level to be maintained for the next 3 years. We expect earnings to grow marginally for the next 2 years and the impact of its Land Checkpoint Project shall arrive in FY13. We value Smartag at RM0.42 and recommend investors to subscribe the IPO.

And their basis of that 0.42 sen price tag.

This is important. Do we just want to take the target price based on face value (ie if KN says 42 sen then 42 it is?) or do we want to know the basis on how they got to such valuation?

• Valuation. The IPO price of RM0.31 is undemanding at 6.8x PER based on FY10 earnings compared to its peer CBS Tech’s average PE Band of 9x. We value Smartag at RM0.42 based on 9x PER over CY11 core EPS of 4.7 sen.

Ok 9x PER based on CY11 eps of 4.7 sen.

Let's look at the earnings table from KN.

Look at the core net profit numbers highlighted by the arrows.
It earned 8.4 million for fy 2008.
The next year, fy 2009 earnings fell to 6.4 million.
 But the following year, the year before Smartag is listed earnings soared to 10.3 million.

Ok. There's two thoughts from me on this.

1. 2009 is generally a bad and messed up year for many companies worldwide. Perhaps it's understandable that we do see such a drastic dip in earnings.
2. The pessimistic side. Well, rightly or wrongly, I had been taught to be aware of companies that has a sudden surge in earnings the year before its IPO listing. Why? The reasoning is that it's a smelly and rotten world out there and there's a chance that the earnings were dressed up for the IPO. Is this the case for Smartag? I do now know for sure but if one is a pessimistic perhaps one could err by being cautious. ( ** note : this one ... very tacky point. Yes.. there is certain implications with this point. Very sensitive. DO note I am not saying that the earnings dressing happened but it's just a thought and I am certainly not implying anything and it's best you the reader make your own conclusion.)

 Anyway, for fy 2011, KN has estimated Smartag would earn some 10.4 million or an eps of 4.7 sen.

The earnings estimate seemed a bit flat, no indication of growth and most important, the earnings estimate is not far fetched. (not like in the case of AsiaEP mentioned in the posting And Who Is Helping The Stock Market Become A Casino? )

So the key figure now is an eps of 4.7 sen. 

If the eps is achievable, then at 28 sen, Smartag is trading at a rather low PE multiple of 5.9x based on KN's estimate of Smartag earnings in 2011.

I then checked my quick data. Sometimes, I use the quick financial tracker provided by the local trading houses.

Here's the snapshot of Smartag's current quarterly earnings.

Smartag reported a loss for it's Q1?

Time to check Bursa website.

On 13th April Smartag made 2 earnings announcements!

• Q1 - Quarterly rpt on consolidated results for the financial period ended 31/12/2010
• Q2 - Quarterly rpt on consolidated results for the financial period ended 31/3/2011

Q1 - a loss of 386 thousand
Q2 - made 653 thousand.
Current ytd earnings - 267 thousand!

Errr... two things.

1. Smartag was listed only on 18th April 2011. So these 2 quarterly earnings was before Smartag was listed and yes, I have said it many times before,  pre-IPO earnings are not too reliable and sometimes we need a financial track record of at least 2 years to make a more intelligent reasoning.

2. However... on the other hand... some reckons that the early morning cow gets to eat all the fresh grass. Yes, some feels that in order to make it big and score a multiple bagger, you need foresight, you need to spot potential and you need to take risk. You need to take a chance! No risk no gain babe. No money, no honey babe.

Well, as I have said many times before, it's pointless for me to argue which is the best stock market strategy. Honestly, if you think your way is ok, just carry on and do it your way. No joke. That's all I can say.

Now if this is the case, then all these pre-ipo earnings and projections becomes more important a yardstick.

So what we have? Smartag half year earning is only 267 THOUSAND. Yes, that's very little little but what's more important, based on this limited data,  it suggests that KN earnings forecast of 10.4 million or an eps of 4.7 sen is highly unlikely.

Think about it. Company made only 267 thousand for the first half of fy 2011. And KN expected earnings for fy 2011 is 10.4 million??????

How?

What do you think now of Smartag's fair value price of 42 sen given by KN? Is it achievable?

And when one puts this factor into perspective, then perhaps it explains why Smartag's current traded price is on a clear downtrend.

But what about the ETP?

Comeon.. a stock should be valued based on its future potential, yes?

I agree.

Let's look at the ETP project awarded to Smartag.

On 19th April 2011: OTHERS: Smartag Solutions Berhad (“Smartag” or the “Company”)Smartag named as part of The Security and Trade Facilitation System using Radio Frequency Identification (RFID) (“Project”) for the Royal Malaysian Customs Checkpoint throughout Malaysia

• Pursuant to the speech given by the Prime Minister of Malaysia, YAB Dato’ Sri Mohd Najib bin Tun Abdul Razak at the Economic Transformation Programme (“ETP”) Progress Update Conference on 19 April 2011, the Board of Directors of Smartag wishes to inform that Smartag was named to be a part of the Project to provide security and trade facilitation system for the Royal Malaysian Customs at its checkpoints throughout Malaysia.
  
  The ETP is a comprehensive effort under the Performance Management & Delivery Unit (“PEMANDU”) to spearhead growth areas in various industries with the objective of raising Malaysia’s overall gross national income. The PEMANDU’s main role and objective is to oversee the implementation, assess the progress, facilitate as well as support the delivery and drive the progress of the ETP.
  
  At this juncture, no memorandum of understanding or agreement has been signed in respect to the Project. Further announcements on the progress of the Project will be released in due course once the Company receives further details on the Project.

Two days later, the Edge carried the following article: Smartag to rely on internal funds for ETP project

• Smartag to rely on internal funds for ETP project
  Written by Kamarul Azhar
  Thursday, 21 April 2011 11:54
  
  PUTRAJAYA : Newly-listed Smartag Solutions Bhd will rely on internally generated funds to finance the implementation of radio frequency identification (RFID) infrastructure at customs checkpoints throughout Malaysia. This was one of the Entry Point Projects (EPP) announced by Prime Minister Datuk Seri Najib Razak at the Economic Transformation Programme (ETP) progress update on Tuesday.
  
  “The Customs checkpoint project enables containers transported via roads to be tracked using our RFID system, which is based on international standards. The RFID seals will be tagged to the containers and scanned by RFID readers which will be set up at land checkpoints,” CEO PK Lim told The Edge Financial Daily in a telephone interview yesterday.
  
  Smartag will provide customs checkpoints with RFID readers to read seals tagged on containers and certified products via a system called Smartrack, he said. Smartrack is a software that serves as a date repository system allowing seamless information sharing between different parties in a RFID system.
  
  The company registered RM5.7 million and RM267,000 in revenue and net profit in the first six months ended March 31. As at March 31, it had total assets of RM30.6 million while total liabilities stood at RM1.7 million. It had cash and cash equivalents of RM1.3 million.
  
  Smartag debuted on Monday on Bursa Malaysia. Its core business in is the provision of RFID solutions, including consultation, planning and implementation. RFID is an electronic system that uses radio frequency signals to identify individually tagged objects or personnel.
  
  The company has been in talks with the Customs Department to implement its RFID system to enhance the efficiency of container clearing and improve security for certified products such as timber, palm oil and halal products.
  
  According to company chairman Datuk Abdul Hamed Sepawi, the project would benefit Malaysian companies as it would pave the way for the creation of paperless customs checkpoints throughout Malaysia, reducing the hassle of paperwork to obtain clearance for containers and transport.
  
  “This project will benefit Malaysian companies, especially manufacturers, exporters, courier service providers and transporters, as it improves the security of certified products such as timber, palm oil, and halal-certified products,” he told the press conference after the announcement of new EPPs by the prime minister on Tuesday.
  
  Smartag will invest RM45 million in the project, which will be spent in tranches until 2020. The EPP will have a Gross National Income impact of RM201 million by 2020.
  
  Smartag’s stock was one of the most actively traded on Bursa yesterday with 63.7 million shares changing hands. The counter closed 3.5 sen or 8.75% higher at 43.5 sen.
  
  
  This article appeared in The Edge Financial Daily, April 21, 2011.

The stock rallied strongly on the news of the award.


On 12th May, Smartag announced the following: OTHERS

• Kenanga Investment Bank Berhad on behalf of the Board of Directors of Smartag, wishes to inform that a Memorandum of Understanding (“MOU”) between Smartag and the Jabatan Kastam Diraja Malaysia (“JKDM”) was signed on 12 May 2011 for the Security and Trade Facilitation System using Radio Frequency Identification (“RFID”) (“Project”) for JKMD throughout Malaysia.
  
  The objective of the partnership between Smartag and JKDM to undertake the Project is to reduce the traffic and waiting time at each customs checkpoint location and also further improve the information system of JKDM in deterring security threats with the use of RFID technology.
  
  The salient terms of the MOU area as follows:-
  
  (1) Scope of Work and Responsibilities
  
  - Smartag will be the main contractor in implementing the RFID system and setting up the necessary RFID hardware at the customs checkpoints throughout Malaysia. - In implementing the RFID system under the Project, both Smartag and JKDM will host seminars and courses to educate and spread awareness about the RFID system to various stakeholders in the logistics industry including members of logistics and transportation associations in Malaysia. - Smartag and JKDM will perform pilot tests on the RFID system under the Project for three (3) months from 1 June 2011.
  
  (2) Period
  
  - The MOU will be in effect until the signing of a superseding agreement between Smartag and JKDM, if any, or any termination request from either parties.
  
  (3) Cost
  
  - Smartag will bear all costs related to the implementation of the Project. The exact quantum of costs and financial impact to the Company cannot be determined at this juncture given the nascent stage of the Project and the full scope of work involved is still being assessed by the Company. Furthermore, the pilot tests have yet to begin.
  
  (4) Termination
  
  - Both parties may terminate the MOU by way of notice in writing at least ninety (90) days in advance.
  
  (5) Confidentiality
  
  - Both parties agree to ensure that all documents, information and relevant data received from each other over the period of the MOU and after the termination of the MOU are kept private and confidential unless such documents, information and relevant data are required by law to be revealed.
  
  Further announcements on the progress of the Project will be released in due course.
  
  This announcement is dated 12 May 2011.

So far, that's all there is.

At this moment of time, it's a MOU only.

On 24th May, Smartag was featured in a Business Times article.  Smartag to start RFID trial run at Customs

• KUALA LUMPUR: Smartag Solutions Bhd stands to make a minimum RM70 million a year once its Radio Frequency Identification (RFID) solution to track container movements is made compulsory.
  
  Smartag, together with the Royal Malaysian Customs Department, will undertake a trial run of the RFID system at the latter's checkpoints from June 1.
  
  Smartag chairman Datuk Abdul Hamed Sepawi said the pilot project will run for three months with major companies from the logistics and manufacturing sectors such as Western Digital, TNT, Federal Express Brokerage and Priority Cargo having signed up for the test run.
  
  Abdul Hamed said the company may charge around RM10 per trip/container for journeys within the country. Taking into this account, Smartag is set to make at least RM70 million a year once the RFID solution is made mandatory. However, this was just an indicative pricing for now, he added.....

The Chairman speaks of the rm 70 million potential.

Yes.. but note that he's saying it's only possible 'once the RFID solution to track container is made compulsory' and for what it's worth... it's just an indicative pricing now.

So how?

Do you want to bet on this potential?

Er..then I saw the following announcements:

Changes in Director's Interest (S135) - Lim Peng Keong

Lim Peng Keong? That's the CEO and according to that announcement some 6,800,000 shares were disposed on 9th May.


Macam mana ni? On the 19th April, Smartag was announced that it will be getting a slice of the ETP projects. On the 9th May, the CEO shows his confidence in his own company by selling a substantial chunk of his shares? Average price of disposal was 0.352.

What lah!

And then on the 20th June, there was another disposal of shares!

Changes in Director's Interest (S135) - Lim Peng Keong

Accordingly the CEO said that 'The disposals were transacted by Namnan Co. Ltd, which my spouse has controlling interest.'
The wife's company also sold shares. Some 4,250,000 were disposed at a price of 32 sen. ( Just one sen above the ipo price of 31 sen).

How?

Project is supposed to be big.

Big money is there to be made.

The chariman openly said that the RFID project could see Smartag making some 70 million a year. Sorry a MINIMUM of 70 million once the RFID solution is made compulsory.

70 million is a lot of money.

And surely if that's true... the shares would be worth many, many times than what it is trading now. And certainly worth much more than what the CEO sold his shares for. And also certainly worth much more than what the CEO wife sold for.

How?

I dunno... but what the CEO and wife is doing here... is clearly sending a bad signal to the market.
And perhaps the current earnings is not helping much.

Which probably explains why the stock is doing so poorly since its IPO listing.

How?

Do you really want to bet on Smartag?

Do you really think it could be an ACE in the ACE stock market?














ps: I am not Paul, Paul's gone and I do not know if Smartag will soar to the moon and neither do I know if it will crash and burn. And oh... neither am I friendly too. :P