It’s been some time since Addvalue Tech (AT) have announced their 3Q 2017 results. I thought its about right to do an analysis on AT’s 3Q results to see if they are on track for a turnaround as mentioned in my thesis.
Revenue was down in 3Q17, however 9M17 showed a 66.6% increase in revenue helped by the increase in revenue registered in 1H2017. I tried searching up 3Q results for the past 2 FYs which did not show any relations with 3Q being their weaker Q of their FY. Hence, I do not believe that their weaker showing in 3Q is due to seasonality factor. From the looks of it, AT is still not recording enough sales of their products and the effects of some of its catalysts have not kicked in yet.
The management has promised in several of their earnings statements that they are focusing on cutting costs which can be seen in the recent Q. In the blue box, it shows that the management is committed to what they said with regards to cutting down on expenses.
Net profit for the 3Q period was a loss of about 1m, while 9M17 is better compared to 9M16 despite still being in a loss.
Not much has improved in their assets, cash and cash equivalents drop by about 50% which shows that AT’s business continues to burn cash. Trade receivables and inventories are lower as well which could be an indication that subsequent 4Q’s results may not be good as well.
We can see a substantial reduction of their debt as of 31 Dec 2017. As announced by the company, they used the money raised from the rights issue to pay off their debt.
Overall, balance sheet has not improved much since my previous analysis. Fundamentally, the company is not doing well.
Cash Flow Statement
The business continue to register negative cash flow from operations, which means that cash is not coming into the company from the product they sell. Even after accounting for depreciation and amortization, AT still recorded a loss. This shows the inherent business is not doing well. Sales of their products cannot overcome the costs involved.
From the cash flow from financing activities, we can see that AT took a 512k loan, which was reflected in the balance sheet above. 9M 2017’s liabilities reflected a 523k in borrowings, which showed that the bulk of the money was borrowed in 3Q17. Furthermore with borrowings > cash & cash equivalents, it reinforces the notion that money continues to be borrowed to finance the company’s operations. This could be a slippery slope, if AT do not record enough cash flow from operations in time to come, as more borrowings will be required to sustain the company. If this gloomy prediction is true, we could see it’s debts balloon up again and calling for another rights issue could be imminent.
Overall, their cash flow remains a huge concern for them.
The company’s strength still lies in them being an industry leader in satellite communications terminal. Their R&D ability is strong given the example of the IDRS. Their partnerships with various big satellite players like Inmarsat and Thuraya is one advantage to their business.
The company’s financial health remain to be a headache for investors. Weak balance sheet, escalating borrowings, coupled with poor cash flow will pull down the company if things do not start to change.
As I mentioned in my previous post on AT, the company have many potential catalysts in place. Their stronger foothold in China through the One Belt, One Road initiative, the development of the new IDRS product which will clock them airtime revenue and the possible disposal of their subsidiary AVC. I wouldn’t put my money on the disposal as it has been delayed for 3 years now. What I see potential in is the venture into China’s market and the new IDRS product. China’s One Belt One Road initiative would see construction of massive infrastructure around the globe and some of these places like deserts have poor communication networks. This is where AT could play a pivotal role in providing their products. Given the massive scale of the project, I believe the venture into China would be a massive lift in their revenue in time to come. The new IDRS product being the first in the world which allows operators of LEO satellites to constantly keep in contact with their satellites can give them an early advantage into the market. In some of their announcements, it was mentioned that airtime revenues will be given to AT which will provide recurring revenue in time to come.
While all the potential catalysts paint a rosy picture on the company’s outlook, the inherent weak financial health will constantly threaten the company. Many of their catalysts have not been in effect yet as shown by their dismal 3Q showing. But the main problem will be if they are able to capitalise on them. AT have all along been a strong R&D company, however, their inconsistent earnings showed that they have not been able to fully capitalise on their innovations. Weak revenue figures only emphasise that although AT’s products are amazing, it has not been able to either market it well or it has not address the customers’ needs.
if anyone were to enter a position into AT now, it would be a punt for good developments within the company or a deliberate play by BBs as the company stock prices are around the lowest ever it has recorded. For long term investors, it would be good to enter into AT after some of their catalysts have come into place which should give them a stronger earnings record. Personally, I love company that have new cutting edge products as this would mean market monopoly and strong earnings but for AT we will still need to observe closely before taking any concrete actions. This should be my last post for a while, as I am going to Thailand for a military exercise. Won’t be posting for some time. Till then, good bye! 🙂