SMRT (0117) : SMR Technology - The NEXT Prestariang?
SMRT, is no doubt one of the star performer in Bursa this year, but the question is, will it rally again? What changes had caused the sudden interest in SMRT for the past 4 months?
Recent events
-On Q1 2014, the company completed the acquisition of 70% of In-Fusion Sdn Bhd which holds Cyberjaya Medical College (CUCMS) at RM27.5m, valuing CUCMS at about 7x P/E which we view it as an earning accretive acquisition. It is paid using debt and internal generated cash
-On Q1 2014, the company completed the acquisition of 70% of In-Fusion Sdn Bhd which holds Cyberjaya Medical College (CUCMS) at RM27.5m, valuing CUCMS at about 7x P/E which we view it as an earning accretive acquisition. It is paid using debt and internal generated cash
-On June 2014, SMRT announced its plan to transfer from Ace to Main Board. The advisor is Maybank Investment Bank Berhad.
-On
July 2014, SMRT proposed to acquire the remaining 30% interest of
In-Fusion Sdn Bhd at RM10m, valuing CUCMS at about 6x P/E, which is much
cheaper than when they first announced at about 7x P/E. Reason: the
rest of the owners want to exit, they were the professors and doctors
that no longer have control over the company, therefore the discount is
justified. Kindly take a look at the announcement on 31 July 2014.
TP: RM1.25
Current price: RM0.795
Market cap: RM183m
Upside: 57%
(A) Company Background
-SMR
Technologies Berhad was incorporated in 2004 and was listed on March
13, 2006 on Bursa. Over the years, the company has grown into a learning
group with several businesses.
-SMRT also involves in English
Learning Training Programme under the Ministry of Education, to train
over 2,000 teachers in 600 schools. They had been running this programme
for 4 consecutive years and the annual contract value is RM30m, the
last contract was offered an extension for 3 years until FY2015.
-SMRT
had in 2012, secured a one year contract from Kementerian Sumebr
Manusia for contract worth RM14m, expiring in a year. This has not been
extended.
-SMRT has technology consulting business, which partners with ORACLE, offering enterprise HR Software and other tools
CUCMS
CUCMS
was founded in 2005, located in Cyberjaya on 5.5 acres plot of land.
CUCMS currently has about 2,500 students and its maximum capacity is
5,000 students. CUCMS currently offers 16 courses, with 4 new courses
approved recently. Currently, IMU, one of the most students sought after
medical university, is charging RM433k while CUCMS only charges RM275k.
On
its medical course, do note that the students quota set by Malaysia
Medical Council is fixed for each medical university. Its medical school
intake had always exceeded its quota for pass 3 years (CUCMS’ quota is
currently Currently, all its students are local and the management plans
to obtain more students from oversea, which would enable them to charge
a 30% higher fees on medical course alone. Why is this important to our
analysis?
Lets break it down:
CUCMS’ medical school fees = RM275,000 (local)
CUCMS’ medical school fees = RM357,500 (foreign)
CUCMS’ additional revenue for each student = RM82,500
Assuming 20% of its quota is allocated to foreign students, we will get additional revenue of:
RM82,500 x 150 x 20% = RM2.5m
More on CUCMS can be found:
(B) Shareholders
Special Flagship Holdings – 28%
Fikir Wawasan Sdn Bhd – 14.7%
Goldleaf Pavilion – 6.8%
Brahmal Vasudevan – 5.8%
Destini Berhad - 5.7%
Palaniappan - 3.6%
Destini Berhad - 5.7%
Palaniappan - 3.6%
-Datuk Palan and his vehicle have more than 31.5% and the rest are long term shareholders. I think I would not mention much about Brahmal. if you had been following the market for the past 2 years, you would have noticed this smart MBA guy from Harvard University, who apparently has the "golden hand" on stocks. Google about him and you will know what I meant. Apparently, from annual report 2013, Brahmal has close to 30% of warrants, making him the largest investors in SMRT-WA. If he converts all of them, it will potentially make him the second largest shareholder in SMRT.
(C) Financial analysis
Revenue
(i) ELT – contribution of RM30m per year is already in the pocket.
(ii) CUCMS – SMRT’s consultant for the acquisition of CUCMS have done a projection on its revenue and profit shown in the circular (refer to the link below). I do think that the projection is conservative. Within Q1 2014 alone, CUCMS alone contributes RM13.5m revenue. If you were to annualize it with no growth, RM54m for this year is very much achievable. On FY2015, I am expecting an increase of organic growth of 10% excluding the growth of RM2.5m that I had mentioned in Section (A).
(iii)
Others – I assume flat for this segment. This division should be able
to generate close to RM20million revenue per year. There was a spike in
revenue on FY2012 because of the one year contract from Kementerian
Manusia at RM14m.
PAT
(i) ELT – using a back to envelope, the ELT contract should provide a PAT margin of 15 - 20%
(ii)
CUCMS – For Q1 2014, we can see from the latest financial results that
this section contributes about RM1.3m PAT. On Q1 2014, as I was an
ex-banker, an acquisition proposal like this would cost about RM600k for
principal advisor alone, in this case, Maybank IB. SMRT has to pay for
other fees to their consultants as well. Generally, we should factor in
about RM1m professional fees on Q1 2014. For FY2015 PAT, I expect margin
to improve due to economies of scale and potential increase in foreign
students (the RM1.9m that I mentioned above). Note that the RM1.9m is
only contributed by medical course alone, there could be more upside
from here if foreigners enroll in other courses offered by CUCMS. I am
sure that the consultants did not include the potential increase in fees
due to foreign students intake for FY2015, thus RM8.1m is considered
conservative.
(iii) Others – Given that revenue is flat, it is
expected that profit margin from this segment might be lesser (11%
based on historical average) than ELT as this segment should be more
competitive as there are many players who is currently working on HR
solution/consulting works in the market.
I have extracted the projection here. You could also download from the circular on the link below. 
Gearing
In
its latest financial results, SMRT has total borrowings of RM16m while
also having a cash of RM11m. Assuming SMRT raise from borrowings to pay
for the remaining 30% stake, its net borrowings would be RM15m. However,
SMRT had raised RM12m from equity markets last month. This would pare
down its net borrowings no merely RM3m which I expect it to turn into
net cash position by FY2015 again(D) Valuation
If you take a look at SMRT's peers valuation, we could use HELP/SEGI/Prestariang as SMRT's peer comparison to derive fair valuation for SMRT.
(i) HELP was trading at 26x P/E when it was privatized
(ii) SEGI currently trades at forward P/E about 25x
(iii) Prestariang - the hot darling for the past 1 year. Prestariang has enjoyed significant rerating when it received contracts by contracts and the coverage by sell side research. Now, it is trading at about forward P/E of 19x.
SMRT, being the ACE market company, has also enjoyed significant rerating when the company was merely trading at P/E of 4x when the stock was hovering around RM0.30. Once it promotes to Main market, I don't see the reason why it could not enjoy a minimum of forward P/E of 16x, valuing it at RM1.25.
(E) Technical analysis
SMRT
has broken its all time high resistance at RM0.75 last week, and it
shall continue to go up from here to uncharted territory.
S1: RM0.75, S2: RM0.69
R1: RM0.875 R2: RM0.955 R3: RM1.02 using fibonacci retracement (Note that fibonacci is only a guidance)
As the chart looks bullish, SMRT could trade further up from this level in the next 1-2 weeks, testing RM0.875 and RM0.955 given the anticipation of the company registering strong earning for the upcoming quarter results.
(F) Risk reward ratio
My 6-12 months target P/E for SMRT is 16x-18x
(i) Upside return of 77% - Using 18x forward P/E, with my forecast of SMRT's FY2015 earnings, it could be trading at RM1.41.
(ii) Downside risk of 11%
- SMRT has broken the resistance of RM0.75 on 23 July 2014, assuming
cut loss position is 3% below the resistance level at RM0.725.
R/R ratio: 7 times. I only take trades that has more than 30% upside and offers more than risk reward ratio of 2.5 times.
1 month TP: 12x FY 2015 P/E @ RM0.94
3 months TP: 15x FY 2015 P/E @ RM1.17
6 - 12 months TP: 18x FY 2015 P/E @ RM1.41
(G) Rerating factors/ Catalysts
(i) Earnings to double in FY2014 and FY2015 due to the full contribution of CUCMS.
(ii) Potential winning of more education contracts from the Ministry of Education.
(iii) Some of the fund managers could not buy Ace market stock until they are promoted to Main market (eg. INARI's case).
(iv) No research house covers this stock yet at the moment.
(v)
Potentially increase in RM1.9m of PAT for CUCMS as the company brings
in more international students (revenue of RM2.5m assuming 25% taxed and
no marketing cost)
(vi) CUCMS is only 50% utilized against its capacity. Any new courses
(vi) CUCMS is only 50% utilized against its capacity. Any new courses
Cheers. I shall monitor the upcoming events for the next 3-6 months, especially the upcoming Q2 2014 financial report that will be announced in 3 weeks time, the upgrade from Ace to Main market and potentially winning of more contracts from the Government.
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