Tuesday, September 28, 2010

Why I Still Like EAH

I have featured EAH as an emerging company with good prospects, despite being a small ACE market company. If you are a regular reader, you will find that there are some companies that I will blog about a few times while others I will just cover once. The reason being, unless I have spoken with senior management and/or visited the company (with other bankers/analysts or groups of investors), I am not likely to write regularly about the prospects of the company. So far, those companies include Notion Vtec, QL Resources, Evergreen, CSC Steel, KPJ, Media Prima, Sealink, and EAH.

Its pointless to visit 100 companies if you haven't done your homework. Usually we would scan and select a few potential companies, run through their financials and business model, before even thinking of visiting them. There are plenty of "small" investors who do their private investing who go through this channel. Of course sometimes you have to tag along when there is an analyst briefing or when an analyst is going for a company visit alone. But you have to network well I guess.

EAH has just announced an attractive free warrants issue proposal. Its 1 free warrant for every 2 shares held. It is not a straight forward thing to get to issue free warrants. That should speaks volume for the corporate exercise. At an exercise price of 59 sen over 5 years, there's no danger of dilution, and the 59 sen exercise price would strongly indicate the upside potential for the share price.

One of the reasons for the exercise is to improve the liquidity for the stock as there is only 155m shares now. The second reason is that the company is bidding for at least RM200m worth of projects, which has a decent chance of being successful - hence the management probably does not want the "upcoming revenues stream" to overwhelm its share base.

Having visited the company prior to its listing and again two weeks back, I am comfortable with the projects they are bidding and I am of the opinion that they should get most of it. The projects are also of high value add which should bring in net margins of at least 35%-40%. The bigger of these projects are at least 2 years to 3 years in duration which will prime the recurring revenue.

EASS Sdn Bhd (formerly known as Excellent Affair Sdn Bhd) is a Malaysian Bumiputra ICT company with the Ministry of Finance as an ICT Contractor. EASS provides automated invoices processing, infrastructure integration services, business intelligence and ICT consulting services.

EA MSC designs & builds state-of -the-art Card Access Controller, Reader and Tag, and specializes in the R&D of world class innovative long range RFID technology. With the in-depth industrial professional experience our people are equipped with, EA MSC strives to be a onestop integrated solution provider of security and surveillance system.

CSS MSC Sdn Bhd formerly known as Concorde Solutions & Services Sdn Bhd, a dynamic company founded by a group of multi national experienced IT specialists, is prominent in delivering business intelligence, operational system, as well as accounting & finance management for mainly financial services Industry. CSS MSC’s strengths are built on expertise in profound e-business products, ITIL centric service management, integrating services for various technologies, total banking solutions, value business solutions, as well as Business Intelligence products.

Products and Services
1. Software solutions
• Business Intelligence and Data Warehousing
Traditionally focused on provision of Business Intelligence and Data warehousing
solutions as well as consultancy services for financial institutions, but not restricted to it. BI can be implemented in industries where business decision making is crucial. A data warehouse is a repository of an organization’s electronically stored data.
• Banking Applications
As at the LPD, ongoing R&D includes a banking system, namely Concordian System
• Automated Invoices Processing
In partnership with ReadSoft, customers are offered ReadSoft DOCUMENTS for invoices solution which is an automated invoices processing solution.

2. RFID and Access Control Systems
• Active RFID
RFID stands for Radio Frequency Identification, it involves the use of an object (RFID tag) to track or identify the tag-bearing object using radio frequency. Active RFID is a new technology due to advancement in IC, has a high margin, high barrier to entry as it is their own intellectual property. Furthermore, EA MSC owns its own IP.
• Wireless Mesh Networking
This system utilizes a key IP and a routing algorithm is also programmed. In effect, the whole system integrates into one big unit. The pros of wireless mesh networking is such that there is no complicated communication wiring involved, thus effectively reducing commissioning time and implementation cost by roughly 40-60%. The network is also programmed such that if wireless communication fails, the Lattice Wireless Access Control will continue to work without any degradation as the database is kept in the controller. This technology is applicable to most existing equipment and adheres to IEEE 802.15.4 Standards.
• Long Range Active Tag
The Lattice Wireless Raintag and Rainsys Active Tag Long Range Reader both have a reading range of up to 5m. The Rainsys reader has 200ms response time, high immunity to noise, an integrated antenna, wireless communication design for retrofitting, long battery life and good penetration through a vehicle’s window tinting. The Raintag is equipped with a unique pre-assigned code, slim, easy-to-carry and durable.
• Lattice Wireless Access Control System
This system is designed for one door (with in & out readers) or two door (with in
readers). It operates on low power wireless network with mesh networking capability and inbuilt is a large memory capacity (data retention period of 10 years). It has an integrated battery management and supports most commercial readers in the market.
• LR1000 Series
In this series are contactless proximity readers. The readers will be able to read all transponder type, EM, Milfare, and provide door access security with time and
attendance application. The LSK 1000 and LSF1000 models exhibit cutting edge touch sensitive keypad with backlight and are designed and manufactured in Malaysia.
• Real Time Location System - Quatis
Quatis is a combination of wireless mesh networking and RFID technology. The location of a tag is calculated by knowing the distance to at least 3 beacons, which is estimated by using RSSI (Receiver Signal Strength Indicator) and TDOA (Time Delay on Arrival). Quatis is produced in accordance to IEEE 802.15.4 standards, hence lower battery size and chipsets as well as no wiring costs.

3. ICT Services
• Systems and Infrastructure Integration
With experiences in Data warehousing and web services technology, EA Holdings also possess the knowledge and competency to perform System integration services based on platforms by major technological principals such as IBM, Microsoft and SAS.
• ICT Consultancy
A team of experts from 4 key areas of expertise will provide ICT systems consulting services.
1. ICT infrastructure;
2. IT systems management
3. Project management; and
4. Mainframe services.
IT service management solutions. Based on the ITIL best practices, EA Holdings engineer turnkey businesses processes together with technology automation.

EASS was granted with bumiputera contractor status from the Ministry of Finance in 2007. This is a key catalyst for EA as it enables the company to bid for tenders reserved for bumiputera companies, giving it a foothold in the government and GIC sector. Any awards won could potentially increase its revenue substantially from a low base. CSS MSC has strong success tapping into the financial sector, with roughly 8 clients in the financial industry since 2005.

Therein lies the key to EAH's prospects, its bumiputra contractor status from the MOF allows them to make the shortlist of many of the more "demanding IT projects".

For the second quarter of the financial year 2010, EAH recorded revenue of RM5.149 million compared to RM5.438 million for the preceding quarter ended 31 March 2010. Notwithstanding the decrease in revenue, EAH’s PAT had increased by 16.2% q-o-q to reach RM1.621 million. Net profit margin stood at 31.48%. The previous quarter it made a PAT of RM1.395m.

Considering that EAH made a PAT of RM3.641m for the whole of 2009, if we were to annualise the last two quarters, the company is on track to record a PAT of RM6.032m for 2010 - which is a 65% year on year jump. I have to state that this does not include any of the RM200m projects being bidded for.

EAH could very well have done a share placement to certain big investors but that would not have benefited all shareholders. This free warrants issue would be welcomed as rewarding long term shareholders.


In terms of valuation, the free warrants would have an intrinsic time value of at least 25%-35%, translating to 16 sen to 22 sen, plus if it goes ex at 63 sen, you can add a further 4 sen to that. If it goes ex at 70 sen, you can add 11 sen to the equation. Thus you are looking at a warrant that is likely to be worth at least 20 sen to a high of 33 sen. That being the case, the shares of EAH may be fairly traded between 68 sen - 78 sen range.

Its ongoing business operations alone is sufficient to sustain valuations at 68-78 sen. If one is willing to hold for 2-6 months, I believe the upside will be better by going through the exercise, with the prospects of good upswing if/when the bidded projects are successful.

NOTE: The above opinion is not an invitation to buy or sell. It serves as a blogging activity of my investing thoughts and ideas, this does not represent an investment advisory service as I charge no subscription or management fees (donations are welcomed though). The content on this site is provided as general information only and should not be taken as investment advice. All site content, shall not be construed as a recommendation to buy or sell any security or financial instrument. The ideas expressed are solely the opinions of the author. Any action that you take as a result of information, analysis, or commentary on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

p/s the masthead photo above is my dog, who is 1.3 years old now, her name is Dali ... that's why I have to keep telling my friends NOT to call me by that name ; )


Buyer said...

Sorry Gu San....I've addressed you as Dali couple of time in previous posting (:- hope the real dali didn't get offended! LOL

kl said...

Salvatore, your bulldog needs serious dental work. As for naming dogs, someone I know named his not so favorite dog after his boss so when he gives commands to the poor mutt, it's like backhanding the unlovely boss in return. Jokes aside, I am seriously looking at EAH even if it is on the pricey side. Looks like your trade on UEM Land turned out well. Well done.