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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