Thursday 20 February 2014

M-Mode Breaks Spectacles

Share market is unpredictable. When everything looks good and promising, suddenly things can turn quickly against you.

Previous example is Zhulian, when its revenue and profit plunged substantially without a warning sign.

M-Mode just released its FY13Q4 results, and it caught many by surprise for the wrong reason.

MMode is a company in my watch list. It provides mobile content and data application services in Malaysia and China.

As smartphone is making its way into the scene, MMode should have benefited a lot in this trend and has posted a string of sterling performance since year 2011.

For FY2013 which ends in Dec13, it looks almost certain that MMode will set a record annual net profit after its 9M13 net profit already stands at 85% of its preceding year full year net profit.

However, this mission fails miserably as its FY13Q4 net profit is only 10% of FY13Q3.

Without any surprise, its share price dived the next day.

A positive note to take is that MMode registers an impressive rise in revenue for its latest quarter. So it is very different from Zhulian.

The reasons for this poor profit are:
  • lower profit margin - gross margin drops from 40% in FY12 to 33% in FY13Q4
  • higher operating cost - rises 45% compared to corresponding period of FY12
  • deferred tax worth RM1.856mil in current quarter (FY13Q4)

The income tax expense actually plays an important part in MMode's much lower PAT for this quarter. Without this item, MMode's PBT of RM13.76mil in FY13 is still higher than RM13.17mil in FY12.

As I'm not an accountant, I don't really understand fully what is deferred tax.

A search in Investopedia reveals that deferred tax can be an asset or liability. In MMode's case, it should be a liability, in which there is a difference between company taxable income and income before tax. 

Does this mean that MMode will need to pay more tax in the future? Its tax rate is less than 1% in FY11 and FY12 as an MSC status company.

Apart from this, MMode's balance sheet is still strong with RM39.9mil cash and just RM2.3mil of borrowings. It continues to achieve positive operating cash flow and its ROE is still at a good 20%.

MMode declares a final 0.5sen tax-exempt dividend. Together with a special dividend of 1.5sen earlier, it is a total 2sen or 3.3% yield at 60sen per share.

Its latest EPS for FY2013 is 72sen, which means it is currently traded at PE of 8.3x at 60sen.

While the decrease in margin, higher operating expenses and possible higher tax rate do cause some concern, I think MMode is still a company that is worth to watch.

It seems to me that the exceptionally high income tax expense for FY13Q4 will be an one-off event, and the growth of revenue is a good sign.

As long as the smartphone users and shipment continue to grow, it will only benefit MMode like it is benefiting Inari Ametron & Globetronics.

Hopefully someone can explain in more detail about deferred tax.


  1. if i nt mistaken during my studies, when the company earn profit and the tax incurred will label as deferred tax liability that goin to be paid in future, however if the company make loss, they can get exemption to pay tax, those exemption will be called as deferred tax assets. as usual, the deferred tax assets will be on assets side and so on with the deferred tax liability. i hope is correct la.. XD

  2. Thanks chrising. That means the company has to pay RM1.856mil tax in subsequent quarters.. This is quite a lot compared to previous tax at less than RM0.1mil a quarter.

  3. this link i hope that can help u as during i study, deferred tax is very confusing topic for us as it involve a lot working..

  4. I find those simple words not simple... But I think I understand "half" should be ok for now as I'm not accountant. Thanks Chris Ng.