Scomnet draws attention


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PETALING JAYA: Following the completion of Supercomnet Technologies Bhd’s (Scomnet) acquisition of Supercomnet Medical Products Sdn Bhd (SMP) for RM80mil, interest has started brewing in the company.

Prior to the acquisition, SMP was just a 20% associate company of Scomnet. With the completion of this deal in April, SMP is now a wholly-owned subsidiary of Scomnet.

The acquisition has started to draw investor interest. Scomnet, which has been on slumber mode for the past six months, has seen volume building up in its stock over the last one week.

This isn’t surprising, as the acquisition will immediately enhance Scomnet’s earnings per share from 0.97 sen to 2.19 sen based on the proforma effects in its circular to shareholders.

In fact, when this deal was first announced last October, the stock’s price doubled from 20 sen to the 40-sen level.

What is the big deal really with this acquisition, and is there more upside moving forward?

Quite simply, SMP is earnings-accretive and the attraction is that it will immediately contribute to Scomnet’s bottom line.

SMP’s earnings are also far higher than Scomnet’s.

In fact, SMP’s earnings have been on a double-digit trajectory over the last few years, thanks to the introduction of a new product - the disposal pressure transducer (DPT), a device used in the medical devices sector.

Based on Scomnet’s circular released to Bursa Malaysia on the acquisition, SMP made a net profit of RM8.7mil for the financial year ended Dec 31, 2014 (FY14). As of the nine months to Sept 30, 2017, it delivered earnings of RM13.6mil. Net profit margins have also been around 30%.

Now, this is significant because Scomnet’s earnings on its own have been lacklustre over the past decade. It fumbles in between the black and the red, making profits of between RM1mil and RM2mil.

When Scomnet announced its first-quarter results to March 31, 2018, SMP’s earnings were yet to be consolidated.

Thus, earnings were flat, with the company announcing a 7.3% jump in earnings to RM1mil on the back of a 42.29% increase in revenue to RM11.81mil.

So, next month when Scomnet announces its second-quarter results, this will be the first quarter when it fully consolidates SMP’s earnings.

Another factor which may have caused interest in Scomnet are the dividends paid out by SMP.

Based on its circular, the dividends have been on an uptrend, where SMP paid out RM2.25mil in 2014, RM6mil in 2015 and RM10mil in 2016.

For 2017, there was a special dividend payment of RM26mil, and this was in part due to the acquisition made.

A RM10mil dividend would imply dividends of 1.5 sen, or a yield of 3.5%.

The acquisition

On Oct 13 last year, Scomnet first announced that it had entered into a shareholder agreement with the vendors of SMP for the proposed acquisition of eight million SMP shares, representing an 80% equity interest, to be satisfied via the issuance of 400 million Scomnet shares at 19 sen, and cash of RM4mil.

This was a related-party transaction, where the vendors of SMP were also the major shareholders of Scomnet.

The acquisition was made at a price earnings ratio of 6.17 times based on the audited profits of SMP for its FY16 and unaudited six months to June 30, 2017 of approximately RM16.22mil and RM8.81mil, respectively.

The vendors of SMP are its managing director Shiue Jong-Zone, director Wu Chung-Jung, executive director Wu Huei-Chung, Hsueh Chih Yu, Shiue Jyh-Jeh and Lim Eng Guan.

Jyh-Jeh is Jong-Zone’s son, while Huei-Chung is Jong-Zone’s wife.

As the bulk of the acquisition was made via the issuance of new shares, Scomnet’s share base increased from 243 million shares to 643 million shares.

The major shareholders and parties acting in concert saw their stake in Scomnet rising from 32.99% to 74.67% as a result of this.

So, it would appear that the vendors of Scomnet are already sitting on a tidy profit, considering the share price of Scomnet is now 43 sen, which has more than doubled from the issue price of 19 sen.

Another way to look at it would be that the major shareholders are still very much committed to the business of Scomnet and SMP.

Some may not be comfortable with the fact that the owners issued 160% more shares to fund its acquisition.

Scomnet addressed this issue in its circular, explaining that the issuance of the consideration shares would ensure that Scomnet would not be burdened with substantial interest payments, as well as repayment of the principal.

Thus, post-acquisition, the gearing level of the company remains at zero.

SMP

SMP was set up in 2004 and sells medical cables and DPT.

As these products are mission-critical in nature, where failure can literally mean the difference between life and death, the manufacturing of these medical products demand the highest quality.

Besides, the medical cable industry has relatively high barriers to entry with long production cycles, as most of the products will require a gestation period of more than 15 months from product development, customer qualification to production on-stream.

SMP’s medical cable is approved by the Food and Drug Administration of the United States, as well as being qualified by internationally renowned manufacturers and established players in the industry.

It started commercial operations in 2005 and turned profitable in 2008. Business took off in 2009.

Both the top and bottom lines surged in 2015 after the launch of a new product, the DPT.

The double-digit growth experienced by SMP from 2015 to 2017 was mainly driven by the enhanced version of the DPT.

Based on the circular, it would appear that SMP has a few new products in its pipeline, with the bulk of the growth coming towards the end of 2018, where the earnings impact will mainly be seen in 2019.

There are four types of products it intends to introduce following the completion of this acquisition.

There is the electrocardiogram lead wire assembly, video cable assembly, thrombectomy catheters and endoscope cables.

All these are expensive products, though, where the cost of development of the thrombectomy catheters for example is about RM120,000.

The targeted completion for these products range between the second quarter of 2018 and the first quarter of 2019.

Thus, this would indicate that should there be a big jump in Scomnet’s earnings, it will take place sometime in 2019.

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