[Eye Candy]: Addvalue Tech, a turnaround play?

Greetings, pardon my corny title above. Haha! Recently, I have been browsing through some companies that could provide great investment opportunities in the near future. My rationale for doing this is so I can put all them on a watchlist and enter them when the time is right. Haha I decided to name this segment “Eye Candy” to remind myself that for now I can only look at it and not take any actions. Haha! Also, I don’t intend to share this on Facebook, as this is purely for me to understand my own line of thinking and for those who chanced upon it on my blog. Alright, let’s dive straight into this company that I found rather interesting. Addvalue Technologies.

Image result for addvalue technologies ltd

Before we go into the nitty-gritty of the company. Let me give you a brief summary of what the company does. For simplicity sake, I will call the company AT in the remaining part of the thesis. AT is a company that provides satellite based communication terminals and solutions for a wide range of  voice and Internet protocol (IP) based data applications. To put it simply, their business revolves around getting you connected to the communication network (internet data, voice calling etc) in places that communication network are not available. For instance, ships out at sea do not really have a fix communication network they could tap on. AT creates a dongle-liked thing which allows you to serve your internet and make phone calls out at sea. They IPO in 2001 when they were in the consumer telecommunication business. Due to strong competition, they sought new growth area and ventured into their current business in 2006.

What I like about this company is their spirit of innovation to venture into a new business when things aren’t doing well. Of course, spirit or not doesn’t matter if their results do not show. Let us then take a look at the fundamentals of the company.

Fundamentals 

To get a holistic view of the company, let’s take a look at the financial report for the past 4 years.

Financials.png

Sorry for the bad alignment!! Haha my first time trying this. As we can see that the company earnings have not been consistent. There has only been 1 profitable year which is in 2014. So I was curious what has caused the company to record losses in FY 2015 and FY2016 when FY 2014 was in the black.

FY 2015

FY2015 problems.png
From AT Annual Report

Profitability was hampered by once off kick ups like buying more expensive materials and R&D efforts.

FY 2016

FY 2016 problems.png

As we can see FY 2016 was impacted by 2 delays which are both related to their working partners. AT ‘s business depends a lot on satellite telecommunications companies like Inmarsat and Thuraya which AT have long partnership with. AT creates the satellite terminals and use their satellite systems to provide connections to consumers who buy their products. Also it’s expansion into China have also been met with some problems cause by economic headwinds.

Balance Sheet wise, AT do not fare well too. It’s borrowings are high. Current ratio do not look good. Very little cash on hand.

Liabilities 2016.png
FY 2016 Annual Report

Hmm not a very good sign…

Cash flow from operating activities have also been in the negative for the past 4 FY except FY2014. Fundamentally this is a company that I would avoid at all cost. But after examining the potential catalysts and the earnings for the 2Q in 2017, I feel that the company could be at its inflection point.

These are some potential catalysts for this company.

1) Earnings growth for first 2 Quarters of 2017

1q17

A 136% increase in gross profit in 1Q 17. (I think there was a typo in the report, but the values on the left usually represents the latest Q)

1h17

A 141.6% increase in gross profit in 2Q17. For the HY, a 139% increase. Comparing 1Q17 to 2Q17, the gross profit also grew 14.5%. That shows an increase rate in earnings as well. That is an encouraging sign.

2) Stronger foothold in China

China MOU.png

This MOU is announced in 26 Oct 2015. AT is required to design and supply products for the “One Belt, One Road” project. AT also entered into a strategic alliance with Zhong You Century a govt linked company in China.

Chinese deal.png

The deal came in after FY 2016 which will benefit FY 17. If you have read about China’s ambitious “One Belt, One Road” initiatives, you will realise that these deals will keep coming given the vast scale of the project itself. Also, if AT have anchor their working relationship in China, future projects in China will more or less be awarded to them. This will provide a form of stable revenue less likely to be impacted by economic headwinds given the strategic importance the One Belt One Road initiative is to China.

3) New product pending commercialisation

AT who have been engaging in R&D and constantly coming out with new products could see their latest product being a game changer. The new product named the Inter Satellite Data Relay Terminal (IDRS). Basically, this product will address long standing issue of communication with Low Earth Orbit Satellite (LEO). Normally a LEO satellite is used to collect data on several information about Earth ranging from climate to land information. Currently, sending data from LEO requires its orbit to meet with the location of where the observer is. In lament terms, there are only certain window of opportunities whereby information from LEO can be sent to the observer. With this new product, AT have circumvented the problem and their new product allows the LEO satellite to be able to communicate with the observer 24/7. This is a first in the industry, and will definitely provide a new form of revenue to AT.

IDRS MOU.png

Just recently, AT announced a MOU signed with Inmarsat to commercialise the IDRS. This will be an exciting development to watch. Whether or not, it will contribute to FY17 revenue will really depends on the rate of commercialising this new product. Just like any first of its kind product, this will give AT an early mover advantage into this market.  Furthermore, if this is patented (I’m not sure if the AT is intending to) it strengthens their market share in the market.

4) Disposal of Addvalue Communications Pte Ltd

The planned disposal of AVC was announced in 2014, but the deal has since been delayed till today. The disposal price is a cash offer of $308 million dollars. If successful, this should help improve AT’s balance sheet and give it enough cash to further expand their operations.

5) Restructuring efforts

rebranding.png

AT is trying to restructure their business model to include avenues for recurring income from airtime etc. This should provide some stability to earnings in the future. rebrandin.png

They will be focusing more on emerging markets like China.

In conclusion,

I feel AT is company that is daring in their approach and not afraid to fail. Being the one of the few listed company in Singapore to venture into the space and satellite industry in 2006 is certainly a bold move. On many occasions, the management have also shown that the company is capable of innovating new products. Although for many years their earnings and balance sheet have not been outstanding, the current list of catalysts should benefit AT favourably in the near future.

at chart.png

AT is currently trading at $0.037, which is around the lowest it ever recorded in its entire listing history. (Lowest was about 0.027). Of course, that doesn’t mean that the stock cannot continue to go down and eventually hit 0. However, given the limited downside risk and the upside potential. This could be a favourable entry point. However, I would still prefer to wait for the upcoming earnings report for more earnings stability before taking any decision. If I am going into this one. It should be a long position. Ultimately, the appreciation of the company stock price on the stock market is more often marked by the increase in earnings. Will Addvalue Tech eventually turnaround their company? Only time will tell.

That’s it from me. This is probably my longest post ever haha! Ohh rmb to dyodd and this post does not in any way promote you to buy this stock. It’s just my own humble analysis. 🙂

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2 thoughts on “[Eye Candy]: Addvalue Tech, a turnaround play?

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