GENETEC (0104): Automation Specialist In HDD

GENETEC (0104): Automation Specialist In HDD

For the period of Jul15 to Sep15, a lot of companies which earn USD produced remarkable financial results. Genetec is one of them.

Genetec's financial year ends on 31 Mac each year.

In the first half of FY16 (Apr15-Sep15), Genetec's financial results look like this:

Genetec (RM mil)	1H16	1H15	Change
Revenue	92.6	58.1	59%
PBT	9.68	1.27	662%
PATAMI	7.66	1.00	666%
EPS	2.18	0.28	678%

Its revenue increased 60% and earning rose by a whopping 660% YoY!

If we annualize 1H16 EPS of 2.18, FY16's EPS can potentially be 4.36sen and now its share price is trading at 29sen though it was only at around 20sen 2 weeks ago.

Is it undervalued?

Genetec is a company involved in industrial automation which provides automation and manufacturing solution for its customers.

It specializes in automation for HDD (hard disc drive) industry in which 84% of its revenue in FY15 were derived from HDD industry.

Other industries that Genetec serves include automotive (9%), pharmaceutical and semiconductor.

Genetec was listed in Mesdaq (now ACE market) in year 2005 and now it's still lingering in ACE.

To know more about this technology company, I think we should study its recent history.

The bar chart below shows Genetec's historical revenue, PATAMI & contract value.

By looking at the orange bars in the chart above, we can see that Genetec's revenue doubled from RM52.5mil in FY10 to RM123mil in FY11. Its PATAMI tripled from RM4.4mil to RM12.4mil in this period of time.

What has happened?

At that time, Genetec took an ambitious step forward with a series of acquisition.

First, it acquired 51% stake in CLT Engineering Sdn Bhd and merged it into the group in Aug10.

Then, it acquired 80% of US-based Systems South Inc in Dec10 and 60% of another US-based company IP Systems Inc in Feb11.

It also acquired new factories at Subang Jaya (75,000 sq ft) and Bangkok (6,100 sq ft) at that time.

Its chairman was also changed to an American.

As a result, new contracts surged to RM212mil (blue bars in chart above) which was a record high in FY12 compared to usual RM50mil a year previously.

It looked like Genetec has taken a giant step towards its vision which is to become the most competitive and world leader in industrial automation.

However, it finally turned out that this was not the case.

After a stellar performance in FY12, Genetec's bottom line suffered after that, despite consistent revenue and contract wins.

This was mainly caused by lower HDD demand, slower US growth and Thai flood.

Its US-based subsidiaries suffered loss and Genetec eventually decided to cease its US operation in 2013, about 3 years after acquiring them.

This has resulted in massive loss in its FY13 which mainly consisted of write-off in goodwill and compensation paid.

After exiting US, as expected, FY14 saw a drop in revenue and new contracts secured, and it actually suffered small operation loss.

However, FY15 seems to be a turnaround year for Genetec as it successfully secured RM171mil worth of new contracts, which was the second highest since the year it ventured into US, thanks to recovery in HDD demand.

Revenue in FY15 also reached historical high at RM145.9mil.

Nevertheless, profit margin was still a problem as it only manage to post a PBT of RM3.7mil in FY15.

As already mentioned above, revenue and PATAMI improves tremendously as Genetec stepped into FY16.

In the first half of FY16, Genetec's revenue increased 60% and earning rose 660% compared to first half of FY15.

However, there are some one-off items which should be watched out.

Its "other operating income" has increased significantly from RM1.7mil in 1HFY15 to RM9.6mil in 1HFY16.

This might be mostly due to forex gain I guess.

Besides, there was also a derivative loss of RM5.9mil in 1HFY16 due to unfavourable forex hedging.

If we simply add in RM5.9mil and deduct RM7.9mil to its PBT, then we can get a 1HFY16 PBT of RM7.7mil.

So, PATAMI will be roughly RM6mil for 1HFY16 (EPS 1.7sen base on 351.7mil shares).

I think this "adjusted EPS" of 1.7sen so far in 1HFY16 are really not bad, probably due to higher new contracts secured in FY15, especially towards the end of FY15 which ended on 31 Mac 2015.

Genetec will announce in Bursa website whenever it gets a new contract. It mentions that the tenure of those contracts normally range from 3 to 9 months depending on the size of order and scope of work.

So, I would consider that high amount of contracts secured from Sep14 to Mac15 (RM142mil) have contributed significantly to its top and bottom lines of 1HFY16.


Genetec Recent Contracts

Date	Contract value (RM mil)
7-Oct-15	26.1
Jun 23, 15	27.3
Mar 10, 15	40.6
Nov 25, 14	27.7
Nov 3, 14	32.0
Sep 29, 14	41.9
30-May-14	28.7

Can it maintain this contract-winning performance in the second half of FY16?

After almost 3 quarters into FY16, it has secured RM53.4mil new contracts, which looks a bit off the pace.

For me, I think that if it can announce another big contract before year 2015 ends, or gets more than RM100mil worth of new contracts in FY16, then its short to mid term prospect will look good.

If not, it will not be good.

As Genetec depends quite heavily on HDD industry, it will closely follow the trend of HDD demand.

Higher HDD demand means that HDD manufacturers will be more willing to spend to improve their production efficiency such as automation.

The management seems trying to "diversify" more towards automotive and pharmaceutical industries but so far there is limited success.

Genetec's recent operating cash flow is good. It manage to repay most of its short term bank borrowing in FY16.

This has lowered its net gearing significantly to 0.12x from 0.47x just 6 months ago.

It seems to be on the right track.

I think its recent good earnings, balance sheet and cash flow are mainly due to high value contracts won since end of FY15.

The same old question is, can it secure more contracts in the remaining of FY16?

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