SOLUTN (0093) SOLUTION ENGINEERING HOLDINGS - - Solution for Education (B)
Introduction
Introduction
Solution Engineering Holdings
Bhd (SEHB) is one of the top 30 stockpick by the Malaysia infamous
investor, Mr. Fong Siling AKA Coldeye. This has drawn our attention to
find out more about the company. While searching online about the
company, we noticed that most of the write-ups about SEHB did not
explain much about the business. Today, we will cover as much as we can
on the group’s main business, and its services/products.
Let
us start with some brief introduction. The SEHB was incorporated in
2004 and was public listed in Bursa Ace Market (formerly known as MESDAQ
market) on the same year. Initially, SEHB was mainly designing and
developing hardware and software for engineering education and research
for high education institutions. Over the years, they have been focusing
on the R&D, which eventually results with wide range of products
and simulation modules. They have also expanded their education and
research products into biotechnology and pharmaceutical field. Today,
the group is involved in several business areas:
1) Educational engineering equipment
2) Production and distribution of lubricants
3) Provision of industrial biotechnology
4) Automation solution provider.
Business
Education Equipment
The
educational engineering equipment business has been the group’s core
business. The engineering equipment division has contributed 80% of the
overall revenue in 2014. The operations of Solution Engineering Sdn Bhd
involved design and develop equipment for engineering education and
research as well Technical Vocational Education and Training (TVET).
Currently, the company has 3 major products: SOLTEQ, SOLDAS and SOLCAL.
SOLTEQ involves wide range of engineering education equipment, which can be categorised into:
- Process Control
- Heat Transfer & Thermodynamics
- Fluid Mechanics
- Environmental Engineering
- Chemical & Bioprocess Engineering Pilot Plants
- Basic Process & Reaction Engineering
Air Conditioning Laboratory Unit (Model AC 01)
Boiler Heating Batching Control Trainer (Model SE 107)
Each
education equipment is specifically designed to represent real
life engineering system in lab scale, which allows engineering students
or researchers to experiment through simulations. Education
equipment are supplied along with process control instruments such as
switches, gauges, transmitters, control valves, process controllers, and
alarms. The client is given an option to include data acquisition
system (SOLDAS) and computer aided learning software (SOLCAL) in their
purchase.
GUI of SOLDAS Data Acquisition System
SOLDAS data acquisition system includes the following in its package:
- A PC with latest Pentium Processor
- An electronic signal conditioning system
- Standalone data acquisition modules
-
Window based data acquisition software for data logging, signal
analysis, process control, real-time display, tabulated results,
plotting graphs.
SOLCAL Computer Aided Learning Software
On the other hand, SOLCAL Computer Aided Learning Software comes with the following items:
- Interactive multimedia features
- Graphical simulation
- Experimental results samples
- Full experimental manuals
Judging
from the functions of the two optional products, it is logic to think
that the two “optional" products are somewhat necessary and very likely
to be purchased with the experimental-based-equipment, which is good
sales strategy. As we can see from its product catalogue, wide range of
engineering education equipment are mostly supplied as a
complete engineering system, we opine that the
equipment components, SOLDAS and SOLCAL are the main inventories,
while the SOLEQ equipment are likely to be manufactured/assembled upon
purchase order/contract and also the major sales contributor. Hence, we
assume the education equipment sales are mostly on contract basis.
Biotechnology
The
main products of SBSB are bioreactor and fermentor for modelling
various microbial (bacteria, yeast, fungi) culture processes.
The Group’s biotechnology segment is operated under its subsidiary, Solution Bioforce Sdn Bhd (SBSB), which specialises in Biotechnology and Pharmaceutical, provides engineering solutions, design / development of biopharma equipment. Incorporated in 2011.
The Group’s biotechnology segment is operated under its subsidiary, Solution Bioforce Sdn Bhd (SBSB), which specialises in Biotechnology and Pharmaceutical, provides engineering solutions, design / development of biopharma equipment. Incorporated in 2011.
The available product series are:
- BLF series: Basic series for small scale production, education and research, available in 1 - 10 L capacity.
- CLF series: Compact series for small scale production, education and research, available in 1 - 14 L capacity.
-
PLF series: Modular, predesign and configured turnkey system for
research to small scale production, available in 10 - 5,000L capacity.
- BTU series: Teaching unit series for education.
Bioreactor series
All
bioreactor series, except for BTU series are supplied as a package
inclusive of other components such as bioreactor system, heating system,
process vessels, software, measurements and control system. Pumps, SIP
(sterilised) and CIP (cleaning) systems are only included in the PLF
supply package for its pilot plant scale.
Lubricant
The
lubricant business operates under Solution Biogen Sdn Bhd contributes
5% of the group’s revenue in FY14. This subsidiary is acquired by
Solution Engineering Holdings Sdn Bhd in 2013. The company mainly
produces local Malaysia brand lubricants, which are biodegradable and
made of esters and other palm oil products. Their lubricant products are
categorised into 4 major types: automotive engine oils, heavy duty
diesel engine oils, marine oils, and motorcycle engine oils. In 2012,
the company is also started to supply Viscosity Index Improvers (VII),
which commonly used in multigrade engine oils, gear oils, automatic
transmission fluids, power steering fluids, greases and hydraulic
fluids.
SOLMAX Lubricants
SCADA & Automation System
This
business area is operated under Solution A&C Technology Sdn Bhd in
which the Group owned 70% of shareholding. This subsidiary specialised
in SCADA (Supervisory Control and Data Acquisition) & Automation
system. The company has participated in River of Life (RoL) project as
automation system provider. The project aims to transform the
polluted Klang River to high economic value environment by river
cleaning and beautification.
Business Analysis
One
of the reasons that it caught our attention to study further is its
high gross profit margin of ~50% and net profit margin of ~20%.
Considering the core business, Educational equipment division, it is
hard to imagine supplying engineering equipment to education institution
could yield such impressive margin. From the previous explanation of
the group’s equipment business, we noticed that using “equipment” to
describe the products could be misleading, we would prefer to describe
the products as “system”. Here is the reason, many would think that the
educational equipment is sold as a single item in which common equipment
business does. In the case of SEHB, their product is the assembly of
many components such as vessels, control instruments, switches,
gauges, transmitters, control valves, PID controllers, alarms, SOLDAS,
and SOLCAL based on their process design blueprint. The process design
blueprints are the results of the invested R&D, which brings values
to its equipment. Hence, this explains why the educational equipment
business yields high profit margin.
Apart
from that, automation solution provider is a service business, which
requires certain human expertise to “assemble” various automation
instruments to create values to the customers. Hence, it could be one of
the contributors to the high profit margin of the group.
However,
looking at the revenue segment of the Group, 99% of the revenue in
2015 is contributed by contracts and the remaining is from sales of
goods, this could mean most of the group’s income is non-recurring. For
instance, it is not likely for the education institution to purchase the
similar education equipment every year, unless for uncommon reasons
such as expansion, but it is likely that certain components of the
equipment will be purchased for maintenance purpose. Hence, this
explains why sales of goods has little contribution to the revenue,
compare to the contract sales.
Growth driver
As
mentioned previously, the core business of the group comes from
engineering educational equipment business. In 2016Q3 (TTM), we
estimated that the top line contribution from overseas has declined from
RM 5.2 mil in 2014 to the latest RM 2.4 mil, which is 7% of the overall
revenue. Hence, the group’s revenue is mainly on domestic education
market. In 2015, Malaysia has 410 private higher education institutions
nationwide. The government is aiming to create 1.5 mil jobs in the
year 2020 under 11th Malaysia Plan (RMK11), where 60% of the jobs will
require Technical Vocational Education and Training (TVET) skills. The
initiative is of good purpose to shift working society from labour
intensive to knowledge and innovative based jobs. To make this happens,
the TVET sector has to increase its annual intake from 164,000 in 2013
to 225,000 in 2020. As mentioned by the management, their educational
equipment business will be one of the beneficiaries of this government
initiative. Apart from that, the management has the intention to invest
in R&D to improve their products to adopt the green and renewable
technologies.
Conclusion
To
conclude this, readers from non-engineering background might find it
difficult to understand the products and services of Solution
Engineering Holdings. We would like to say it is absolutely normal, as
the business model is based on engineering knowledge. Hence,
investors are expected to require some engineering and technical
experience to understand the business. We always believed that investing
in business within the Cycle of Competence is important in investing.
We believe that margin of safety does not merely come from valuation
alone, it also comes from the qualitative aspect of a business.
References:
SOLUTN (0093) SOLUTION ENGINEERING HOLDINGS - - Solution for Education (B)
http://klse.i3investor.com/blogs/stockify/114508.jsp
