Grand-Flo Solution Bhd - A disappointing 9M12 results

INVESTMENT MERIT

- A disappointing 9M12 results. The group’s 9M12 net profit of RM5.9m was lower by 17.3% YoY and merely accounted for 64% of our full-year projection. The disappointed result was mainly due to 1) a lower EDCCS segment margin despite a higher domestic sales, which saw the segment revenue growing by +28% YoY; 2) a lower operating profit as a result of the higher administrative costs and distribution expenses and 3) a higher finance cost. The group also incurred a one-off expenses of RM0.8m in 3Q12 on the transfer of its listing to the Main Market of Bursa Securities. Stripping off the one-off expenses, GRANFLO’s PBT will be at RM2.3m (-23.7% YoY) in contrast to a RM3.0m profit a year ago.

- 0.5 sen DPS on the cards in 4Q12? While GRANFLO did not declare any dividends in 9M12, we project the group to distribute a 0.5 sen DPS in 4Q12, which translates into 2.2% dividend yield or a 20% payout ratio for FY12. Our DPS projection is in line with the company’s dividend policy, which targets to declare a minimum 20% payout. The dividend, should it come in, will be an attraction for investors as compared to othe ther small technology companies, which have not committed to a dividend policy like GRANFLO.

- The outlook remains encouraging despite the disappointing 9M12 results. Going forward, while the EDCCS segment and the labels business segment will continue to be the group’s bread and butter businesses, GLANDFLO will also start to recognise RM6.4m/year in revenue for a period of over 10 years from its CAT project. To recap, the group was awarded the installation job of 4,500 ports in two provinces near Bangkok under the country’s fiber optic project. We understand that this project has already been completed and is expected to generate at least RM64.0m in revenue over the next 10 years according to management. We have imputed the above contribution into our FY13 earnings projection. 

- Downgrade to Trading SELL with fair value at RM0.23/share. Post the results, we have cut our FY12 and FY13 net profit projections to RM7.8m and RM8.2m, respectively (vs. RM9m and RM10m previously). GRANFLO is currently trading at FY13 PER of 8.6x, which is already relatively close to the FBMKLCI Top 100 Small Cap FY13 PER of 8.8x. Hence, we are downgrading the stock to Trading SELL (from Trading BUY previously) in view of the limited capital upside.

SWOT ANALYSIS

- Strength: Established regional network, growing recurring income stream.

- Weaknesses: Small market capitalisation.

- Opportunities:  Expanding its  business into the healthcare sector and other regional markets e.g. Thailand and Vietnam.

- Threats: Economic and political risks.

TECHNICALS

- Resistance: RM0.25 (R1), RM0.28 (R2)

- Support: RM0.22 (S1), RM0.20 (S2)

- Comments: Grand-Flo's share price had been range-bound for the past half a year. The indicators are also non-trending though trading opportunities exist where investors may look to buy at the RM0.22 support, and sell at the RM0.25 resistance

BUSINESS OVERVIEW

Grand-Flo Solution Bhd (“GRANFLO”, BURSA CODE: 0056) was founded in 1994 and is today a leading integrated tracking solutions provider, consisting of EDCCS (Enterprise Data Collection and Collation System) & labels production. GRANFLO has an established regional network in Malaysia, Thailand, Vietnam, Singapore, Hong Kong and China, and a reputable clientele base amainly comprising of MNCs (e.g. Western Digital, Motorola, F&N, Tesco) & GLCs (e.g. Pos Malaysia, Communications Authority of Thailand). 

BUSINESS SEGMENTS

 EDCCS Solutions:  Provides complete front-to-back-end integrated barcoding & RFID tracking solutions, from hardware  and software, to systems maintenance, and barcode labels solutions. Besides, GRANFLO also provides complementary products such as IT infrastructure and Point of Sales systems (e.g. Fixed Position Scanners, Barcode printers, and etc.)

 Labels: Manufactures barcode labels and other self-adhensive labels for general food, consumer products, pharmaceutical and toiletries industries. Recently began producing cleanroom-grade labels for semiconductor sector.

Source: Kenanga