Hi all, I have decided to do an update on Addvalue Tech since a lot had happened since my last post on Addvalue. For those who may not know what I am referring to. You can check out my 2 posts on Addvalue below.
A few things happened since my last post. Addvalue declared 2 trading halts in a span of a few weeks.
Firstly, news were released about AT raising money to prepare for the commercialisation of the IDRS. If you are thinking that raising money = debt = even more financial trouble at AT, then these news will be slightly different. Money were raised in 3 forms, one is through the issue of new ordinary shares, convertible loan notes and lastly an exchangeable bond worth $2 million.
Why I would say this will be slightly different is because majority of those who gave their money to AT are affluent investors. They include investment firms and some accredited investors. The placement shares were priced $0.039 per share.
As for the convertible loan note, its a 5% per annum with a choice to convert it into shares of the company at $0.055.
Once again, most of the subscribers of the placement shares are also subscribers of the loan note.
Also a venture investment firm known to be Cap Vista, the investment arm of DSTA invested $2 million in the form of exchangeable bonds for 5 years. It is a 5% per annum payable in full on maturity, however in the event that AT spin off Addvalue Solutions (AVS) a subsidiary of AT, these shall be exchange for shares in the company. FYI, AVS is the arm in AT that is focusing on the development of the IDRS, hence the investment.
These shows that there is a form of quiet optimism that AT’s IDRS will succeed. That’s the reason for the slight difference.
— Uptick in sales —
It’s current product the Wideye iFleetONE terminal have earned an initial trial order of about US$1.0 million. It is also in discussion with potential customers for an additional order of about US$3.5 million.
I am not sure if the initial trial order amount of 1m is going to be recorded in Q4. But let’s assume it is. This would mean a revenue of more than US$10 million for FY 2017, as Q4 usually records 2-3 million in revenue. That would be much higher than the 9 million revenue recorded in 2016. Using a bold estimate, we could see AT returning to the black, as AT have been trying to cut cost in recent Qs. Currently, 9M2017 is a loss of US$1.2 million. Of course the above is my personal estimation, we shall see if its true in the coming FY announcement.
2) Risk remain
The recent spate of events have ticked some of the catalysts that I have laid out in my first post on AT. However, risk like their cash flow still remain in this business.
— Cash Flow —
Having sales is of no use if the company cannot bring in cold hard cash to finance the company’s operations. As for now, it could be a race against time to see if they can fully commercialise the IDRS before their money eventually run out. I am still hoping that they could finally reach a deal to sell away AVC one of their subsidiary in order to spice up their balance sheet. I will be watching its cash flow closely in the coming earnings report.
The recent events have caused the stock to run up from $0.044 to $0.062. I have a tiny portion at $0.04 just 0.1 cent higher than the placement share. For now, I am holding out since I am already in the money. I am looking to add to my position when the stock consolidate or after the upcoming earnings results. Personally, I feel quite confident of the IDRS project, now the ball is in AT’s court to translate what they have into an earnings generating monster!
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.
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.
To get a holistic view of the company, let’s take a look at the financial report for the past 4 years.
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.
Profitability was hampered by once off kick ups like buying more expensive materials and R&D efforts.
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.
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
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)
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
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.
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.
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
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.
They will be focusing more on emerging markets like China.
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 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. 🙂