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Saturday, October 14, 2006

Autron @ 11 cts ( Electronics equipment / Singapore ) 0 comments

Final Poll Results: 4:1

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Main issues

1. Options constricted by huge current debt

2. Growth limited by impending sales of Northeast-Asian operations

3. High receivables and writeoffs

Let's start by listing down the pros of this stock. It had previously been in the crosshairs of retail and even institutional investors for its substantial scale and play on the theme of electronics manufacturing outsourcing to Asia, due to its core business of distribution of electronics manufacturing equipment in the region. It has sunk terribly on the back of bad earnings these two years but some point to the balance sheet and say its net assets of A$93M convert to S$0.16 per share based on 694M shares (and conversion rate of A$1:S$1.2 ). Add that to the impending sales of its Northeast Asian businesses for US$60M to North Asia Strategic Holdings which would effectively release S$0.14/share to the group --- when it is trading at $0.11 now.

It would be dangerous to see it as a value play. To be honest I had been interested in Autron initially on the basis of precisely this premise, and yet now I think it's a hotstocknot primarily on the basis of clues from various discomforting corporate/shareholder moves, as discussed below.

Consider the moves of the abovementioned North Asia Strategic Holdings, soon to acquire the Northeast Asian operations of Autron in late October. Originally in May the plan had been for it to inject equity and convertible debt into the Autron group; however in August NASH changed its mind and proposed to buy the entire Northeast-Asian operations of Autron instead. Looking at the full-year results released in September (it incurred full-year losses when up till 1H06 it was profitable and seemed to be turning around its operations) and its fragile balance sheet showing ~A$100M current debt, it is likely that (1)Autron was negotiating from a position of weakness, and (2)the Northeast Asian businesses had greater value, and (3)it was more worthwhile to buy the Northeast Asian distribution business and take control than take a passive equity position in the entire Autron group (from the perspective of NASH).

Next consider substantial shareholder Kingdon Capital Management, which trimmed 3.3% off its previous 5.1% in Autron for around 10-11 cents in early October when the stock rose slightly on volume. It says a lot about its views about the acquisition deal, presumably closing just three weeks later, that it is instead taking the chance of high trading volume to exit the stock. It's a huge loss for them, considering that they bought in June 2005 at ~24.5 cents.

The problem with analysing the mechanics of the upcoming acquisition deal is due to the lack of detailed geographical segmental information regarding its Northeast-Asian business. The financial statements show that revenue contributions from Northeast Asia contribute two-thirds of the total distribution business revenue pie, but say nothing about profits. The asset distribution is opaque, because of high eliminations (possibly due to both geographical segments sharing assets). Autron did not help clarify potential gains/losses in their statements concerning the deal.

Reading past analyst reports, the promise appears to be in the Northeast-Asian markets, where Autron's long history of operations in Asia – more than 20 years in Greater China – has gained it numerous blue-chip customers eg. Taiwanese contract manufacturers. In particular, China as a key PCB producer is the key outsourcing centre and demand centre for manufacturing equipment. A restructured Autron with its focus on Southeast Asia would provide little attraction and would indeed be going the wrong way --- due to the long-term shift of manufacturing activities from Southeast Asia to North Asia. Disposing of its Northeast Asian distribution business also removes avenues for growth of its equipment refurbishment business --- another growth driver that was supposed to drive margin increase.

Enough about growth. What about value? Consider that A$125M (>S$0.20/share) of its total A$210M current assets is receivables --- half a year's worth of revenues. A$10M, or 8%, of these had to be written off as doubtful debts in FY06, compared to none the previous year; this leads one to be concerned about the quality of its earnings and its receivables (I believe these writeoffs were mainly responsible for its FY06 losses). On the liabilities side, as has been mentioned, current debt of ~A$100M has to be refinanced or repaid quickly --- a possible destination for the funds obtained from the sales of its Northeast Asian operations. There remains extensive risk in restructuring the business after the sale and there is little chance of the company returning more cash to shareholders beyond the 1-cent dividend it has declared. Nor is the full extent of the recently proposed share buyback program going to be exercised, in my view.

(1) S&P research report on Autron Jun 2004
(2) UOB research report on Autron Apr 2004

Poll(please vote)
I agree that Autron is a hot-stock-not: Yes/No




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