Good value in Global Soft

  • Business
  • Saturday, 12 Jul 2003

Online investment advisor on the value of investing in Global Soft

OUT-PERFORMANCE for Global Soft? Our search for value amid the ongoing liquidity drive has brought us to the relatively low profiled Global Soft (MSC) Bhd (74.5 sen) – a recently listed Mesdaq company which specialises in the software segment of the IT industry. We believe Global Soft offers good potential due to its attractive valuation, high margins and promising track record. While overall IT demand remains rather lacklustre this year, we find Global Soft surging ahead on the back of market share gains and new product introductions. 

New growth area? Global Soft is an Enterprise Resource Planning (ERP) player which has recently made inroads into the sale and installation of theme park software, marketed under the name of Global E-Ticketing. 

After clinching a contract for the Sunway Lagoon Theme Park in October 2002, we heard that Global Soft is now the front runner to implement E-Ticketing for two more theme parks in Kuala Lumpur and Perak. These new contracts could potentially be worth more than RM1mil each – providing considerable lift to Global Soft's outstanding order book of RM3.9mil. As further indications, its 2002 turnover was only RM3.4mil. The theme park software is also helping Global Soft to expand regionally, kicking off with Vietnam where a few theme parks are believed to have shown interest. 

Elsewhere, Global Soft's conventional ERP business remains robust, partly spurred by the manufacturing grant from the Small and Medium Industries Development Corp, where the government subsidises up to half of eligible ERP costs for small manufacturing concerns. 

Upside in forecast? When Global Soft was listed in April, we forecast that it would achieve net profit of RM2.1mil in 2003. This now looks set to be surpassed as it has already clocked in just under RM800,000 net profit in the first quarter, and based on current order book, should be on track to make at least RM1.5mil in half-year net profit. Assuming that this is maintained into the second half, Global Soft should be on track to achieve full-year net profit of RM3mil, more than doubling the RM1.3mil achieved in 2002, and 43% ahead of our original forecast. 

Meanwhile, further earnings upside could be in store should it secure new theme park contracts in the future. We should also highlight that this growth will be achieved on the back of Global Soft's high pre-tax margin of 37%, which is attainable due to its pure software focus. 

Management shows promising start. Undeniably, the software industry is a challenging one that needs navigational help from an astute management team. Global Soft's young team of managers has done a good job, growing net profit uninterruptedly to RM1.3mil in 2002 from RM200,000 in 1999. 

Not willing to rest on its laurels, the management has ventured into developing a niche in the theme park software, an area with limited competition. In fact, in a recent theme park software tender, we understand that Global Soft was the only company to have submitted a bid. 

Elsewhere, it is reassuring that so far none of Global Soft's management has sold down the shares, despite the current market price being about 50% higher than IPO price. The only significant transaction to date was by an individual seed investor, who reduced shareholding by 1.75% in early June. 

Good value. At its Mesdaq debut in April, we placed a fair value of 60 sen per share on Global Soft. This was based on our original 2003 EPS forecast which has since been upgraded by 43% to 7 sen! As a result, Global Soft's 2003 PER has been enhanced to 10.6 times, the lowest among its Mesdaq peers, which trade in the 14-32 times range, and also more compelling against main and second board IT/software stocks which mostly trade above mid-teen PERs. 

Based on its attractive valuation, we would recommend a BUY on Global Soft. We would, however, stress that the stock may not be suitable for very conservative investors, as its earnings base is small and its history also rather limited. Balance sheet wise, Global Soft is estimated to have about RM5mil net cash, which works out to 12 sen per share or a good 16% of its current share price. 

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