Friday 6 December 2013

Car Electronics Maker Builds Hospital

Multico is one of the stocks in my stock alert list. It caught my attention because of its low PE ratio and good dividend yield. It is in Cold Eye's 42 stocks list as well.

Multi-Code Electronics is a Johor-based manufacturer of vehicle electronics parts founded in 1990. It has now grown to become a leading Original Equipment Manufacturer (OEM) specializing in full spectrum of design, manufacture and supply of automotive electronics and mechatronics parts for the Malaysian and regional markets.

In Malaysia, it has Proton & Perodua as its clients with long-term contracts to supply various car electronics parts such as reverse sensors, functional switches, key sets, actuators, power window regulators, anti-theft system etc.

Though the national cars contribute to a vast majority of its business, Multico also supplies parts to Honda in Melaka and Ford in Thailand & Australia.

Multico's revenue has been flat for the past four years (FY10-FY13 end July) between RM100-110mil. From its recently announced financial result, full-year FY2013 revenue falls slight from RM111.1mil to RM109.2mil, but net profit rises from RM11.1mil to RM28.9mil.

Multico Financial Result FY09-FY13

RM mil Revenue PAT
FY09 84.7 0.2
FY10 103.7 9.4
FY11 101.6 8.7
FY12 111.1 11.1
FY13 109.2 28.9

In FY13, there is a one-off gain of RM19mil from the recovery of doubtful debt arising from the legal actions and proceedings against its certain former directors and subsidiaries.

Without this special gain, I think Multico's net profit for FY13 should be around RM11.5mil, which will still break its previous year's record of RM11.1mil by a thin margin.

At this estimated FY13 earning of RM11.5mil, Multico's EPS will be 25.9sen base on 44.4mil shares. This will give it a PE ratio of only 6.4x at current share price of RM1.67. A fair PE of 10x will give it a fair value of RM2.59.

Multico gave away 12sen of net dividend for its FY2013, representing a net yield of 7.2% at share price of RM1.67. However, 6sen of it is a special dividend due to the special gain. Thus its future expected dividend yield is about 3.6% (6sen).

       Functional Switches

In mid November, Multico made an announcement to purchase a 3.3acres commercial property within Setia Alam for RM28.6mil to build a healthcare facility. 

What? A car electronics manufacturer diversifies into provision of healthcare services?

The first question that comes to my mind is, is any of the directors or major shareholders a medical doctor?

Yes, true enough. After checking through the directors profile, Multico's executive director and single largest shareholder Goh Kar Chun holds a medical degree from Ireland. He worked as a medical doctor for 2 years  in Ireland before joining the company. 

Apparently he made a wise decision in joining Multico. He is only 37 years old now.

However, in my opinion, I don't think the decision to build hospital will benefit the shareholders in the near future. Establishing a hospital is neither cheap nor easy. It needs a lot of money and experience. It may require a joint venture with an experienced partner.

The construction of the hospital building will only commence in year 2015 and is expected to be completed in 2018. So during these years, I would expect Multico's earning to be under pressure due to the cost involved. 

Furthermore, when the new hospital starts to operate in 2019, usually it will register loss in its early years due to lack of customers and high staff cost.

       Goh KC & Lim MK

Without this healthcare diversification, Multico's core business seems to be quite stagnant for the past few years. The management has a plan to expand regionally especially into Indonesia & Thailand. I'm not sure how's the progress now.

Back in July, Multico has signed a joint venture agreement with an Indian party to manufacture and supply automotive parts in India. However, there is no further announcement made until now.

I believe the overall automotive industry will grow in the near future. However, national cars may face stiff competition from other car makers.

Even though it is traded at relatively low PE, it is very unlikely that I will invest my money into it in the near future. So, I'll remove it from my Stock Alert List.

Fundamentally, Multico is still a good company with some growth potential in its core business.

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