PETALING JAYA: Elsoft Research Bhd
’s recent proposed acquisition of a customised automation equipment manufacturer may be a potential catalyst for the automated test equipment (ATE) solutions provider’s share price.
In addition, Elsoft’s impending commercialisation of a new series of embedded controllers in the medical devices segment could also alleviate the outlook for the company as it enters a soft patch in the near term.
Citing a recent engagement with Elsoft’s management, TA Research noted a key synergy to look forward to from the company’s proposed acquisition of Penang-based automation equipment manufacturer, Xyrius Solutions Sdn Bhd, was the ability to leverage on the latter’s expertise in automation.
“Management alluded that plans are for Xyrius’s co-founder, Ang Aik Beng, to spreadhead Elsoft’s automation capabilities.
He has about 24 years of experience designing and manufacturing customised automation equipment,” the brokerage wrote in its recent report.
“Significantly, an enhancement of automation capabilities for Elsoft’s existing portfolio of ATE and burn-in systems would help improve the competitiveness acceptance of its products and/or prototypes,” it added.
To recap, Elsoft last month announced a proposal to acquire Xyrius for RM10.1mil, which would be satisfied via a combination of new issuance of Elsoft’s shares issuance and cash.
According to TA Research, the commercialisation of Elsoft’s embedded controllers in the medical devices segment was pending its customer’s receipt of a certification for the peritoneal dialysis machines.“We expect traction on this front to help the group reduce its concentration risk to the intelligent devices and automotive segments, which collectively accounted for more than 80% of its revenue over the past years,” the research house said.
“We also view bright prospects from the market for peritoneal dialysis machines amid growing adoption of peritoneal dialysis as an alternative to conventional haemodialysis treatment and growing incidence of chronic kidney disease globally,” it added.
For the time being, TA Research maintained its “sell” recommendation” on Elsoft, with a target price of 55 sen a share based on a price-earnings multiple of 23 times the estimates for financial year ending Dec 31, 2024 (FY24).
The rating reflected TA Research’s cautious outlook for Elsoft.
“For FY23, Elsoft continues anticipating sluggish demand for its ATE and burn-in systems. We gather that the group’s customers remain cautious about capital expenditure amid the global economic slowdown and the semiconductor sector’s down cycle,” it said. On a brighter note, the brokerage pointed out that, Elsoft’s management had guided that the group’s current book-to-bill ratio had improved to a multiple of around one time, as compared to less than one at the end of FY22.
It noted that the group’s latest order book stood at RM15mil as at March 2023 versus RM13mil in February 2023.
The order book was anchored by ATE and burn-in systems under its core smart devices and automotive segments.
“Demand is also supported by customers pursuing the China plus one strategy amid ongoing US-China trade tensions,” TA Research said.
All in all, against the weak backdrop, the brokerage maintained its forecasts for FY23 sales and core net profit to moderate to RM21.8mil (down 22.4% year-on-year (y-o-y)) and RM10mil fown 15.9% y-o-y) before staging a rebound in FY24 to RM33.1mil (up 51.7% y-o-y) and RM16mil (up 59.7% y-o-y).
