Advance SCT @ 45 cents ( Electronics mfg / Singapore ) 1 comments
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1.High valuation for a micro-cap
2.Growth story looks to be priced in given recent surge
3.Aggressive growth will stretch balance sheet
4.Medium-term outlook looks less sanguine with industry peers correcting
Advance SCT describes itself as a "leading provider of independent PCB testing services". It is a SESDAQ-listed microcap with a revenue base of S$15M in FY04, and it raised about S$4M in its IPO in late 2004. So how "leading" can it be?
The stock price for this company has appreciated to its current price from an IPO price of 24 cents, and is now trading at a trailing PE of ~20 times and 4 times NTA (net tangible assets). Such a valuation for a microcap is always excessive to me, no matter how bright its prospects are being trumpeted. But let us be fair to the company and examine the case for the company's high price valuation.
The growth story is being seen as very promising by brokers such as Phillip Securities, who are seeing a doubling of topline and at least 50% bottomline growth every year until FY2007. The company is growing through mergers/JVs, with deals done in Taiwan and South Korea, a partial stake in recycling company Green World, and a planned acquisition in a Chinese copper anode manufacturer FC Copper coming up. All these are seen to provide synergy to enable Advance SCT to become a vertically integrated PCB services provider, from the material collection (Green World), to PCB raw material (copper anodes) manufacturing to the incumbent core PCB testing services.
My doubts about its current valuation are many. Firstly, the growth story looks like it has been priced in given its doubling of share price within months of its IPO and its current price consolidation (which sets the stage for a major move, in my view in this case, NOT upwards). Secondly, for such a small company it looks to be trying to take too many big steps at one go; it had to loan S$9M to finance its Green World acquisition (which is still only an associate) and has to fork out another $5M for its upcoming acquisition of FC Copper. Its shareholder equity is only ~S$10M so post all these acquisitions its gearing ratio might well be leaning significantly towards the debt side (of course, one of the good things about a high share price is the ability to tap on the stock market --- hint hint... ). Thirdly, third-party PCB service providers of its type have not performed well recently; look at comparables like Eucon and Jadason, which have seen collapses in performance. Although one can say Advance SCT is thus outperforming its peers, I would suggest that the poor industry environment suggests strong execution risks that Advance SCT would have to overcome in consolidating all acquisitions and bring profit growth in line with what current valuations seem to factor in.
One should also take note that a substantial shareholder Charles Leck has recently halved his holdings from about 6% (total interest) to about 3%. He is not a director which probably suggests he is a pre-IPO investor who is cashing out partially after a 6-month moratorium. Usually I view these substantial shareholder sales less pessimistically compared to executive director sales for obvious reasons but in this case when coupled with main concerns listed above, it suggests profit-taking on a view of the risks outweighing the potential, an opinion which I share.
(1) The latest analyst report from Phillip Securities