Tuesday, 12 March 2013

SMR Technologies - Cautious outlook


INVESTMENT MERIT
- A roller coaster. SMRTECH share price went up to as high as RM0.315 after our TRADING BUY recommendation at RM0.22 in August last year. However, the stock has since fell back after November, which we believe was due mainly to its anticipated disappointing 4Q12 results.

- FY12 results below expectations. SMRTECH’s FY12 net profit of RM8.7m was below expectations and only accounted for 61% of our FY12 projected earnings of RM14.2m. In fact, the group also failed to meet its own management’s internal target of RM14m. The main culprits were mainly due to: 1) higher staff costs; 2) some one-off expenses incurred from the acquisition of a cloud computing company for RM680k and other corporate exercises and 3) a higher effective tax rate of 14.4% vs 5.6% a year ago after its MSC status expired in FY11.

- Sacrificing margins to secure more contracts. The group’s FY12 margin fell to 31.5% from 38.5% a year ago as a result of the intensifying competition at both its local and oversea markets. In fact, the group’s GP margin has continued to head south since FY09 from 67.6% to the current 31.5%, which we believe was mainly due to the increasing competition in its HR solution segment, forcing the group to continue to sacrifice its margins to gain market shares.

- Management remains bullish for FY13 despite the intensifying competition. The group is targeting to achieve a low-teen annual net profit growth rate, underpinned by its current order book of RM32.7m and potential more contracts wins from Gulf Co-operation Countries (“GCC”). We understand that the company currently has a tender book of RM103m, which mainly focuses on HR solutions and workforce education projects. Meanwhile, we also understand that the group is eyeing to transfer its listing status to the Main Board in CY14.

- Valuation. SMRTECH is currently trading at FY13 PER of 5.0x, which is at a 45% discount to its local software industry peer, CENSOF’s FY13 PER of 9.3x. The discount is fair, in our view, given CENSOF has a much higher market cap of RM145m as compared to SMRTECH’s RM38m. Despite management continuing to paint a bullish picture, we are taking a cautious stand on the company due to the intense competition, which could potentially lead to further margin constraints going forward. TRADING SELL.


SWOT ANALYSIS
- Strength: Specialises in a niche segment - integrated HR products/services. Strong clientale in the O&G sector.

- Weaknesses: Low market cap. Risk in succession planning.

- Opportunities: Penetration into other high competency level sectors e.g. Healthcare, Aviation.

- Threats: Contract and macro-economic risks.


TECHNICALS
- Resistance: RM0.21 (R1), RM0.325 (R2)

- Support: RM0.145 (S1), RM0.13 (S2)

- Comments: SMRTECH’s share price has broken below the “Head and Shoulders” neckline at RM0.21. As a result, the technical picture has deteriorated significantly which adds on to the already weak indicators. Hence, traders should look to sell at these levels.


BUSINESS OVERVIEW
SMR Technologies Bhd is engaged in the provision of integrated HR solutions for SMEs and government agencies with a presence locally and in ASEAN and GCC countries. SMR Tech’s clienteles are mainly involved in industries that require higher competency levels such as Oil & Gas, Aviation and Healthcare.


BUSINESS SEGMENTS
SMR Technologies offer integrated software solutions that assesses an employee's competency, identifies shortcomings, identifies and plans training and manages succession plans and talent pipelines through the following products/services.
- Software & technology
- Consulting & outsourcing
- Learning & development and learning resources
- Talent search
- Capacity building

Source: Kenanga

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