Review of $Excelpoint(BDF.SI) 's quarter results:

A few plus points:
1. Revenue increase of 17%. Even though profit margin didnt increase much, revenue is still growing steadily. This means that they are getting more and more business from their customers.

2. FINALLY, cash flow generated from operating activities!! 3 million generated compared to 21million used in the same quarter last year. This is despite rising revenue and profits. I see this as a MAJOR plus point as they are improving their cash flow.

3. Usage of placement shares proceeds. 5million of the 7 million is dedicated to Investments and Acquisitions. With this, Excelpoint will be able to possibly ramp up distribution/production and increase their profitability.

4. Strategic partnership with Analog Devices ADI is an american semiconductor company with 5.4 billion USD in revenue in 2016. Hopefully Excelpoint will be able to leverage on this relationship to boost their revenue. Even with just a small percentage of revenue clinching, i believe they will be able to increase their profit manyfold.

A few negative points:

1. Increase in interest expense due to borrowings.

2. Increase in borrowings.

3. A slight drop in EPS because of the increased number of shares.

Overall, this is a great set of results, and the major plus points being the improved operating cash flow of the company and the strategic partnership with ADI.

With this set of results, Excelpoint is on par to record an EPS of 7.36 US Cents for the full financial year if we compare with the previous year. This means that, the current price represents just 6.5x PE.

If Excelpoint just grows to a PE of 10, it is worth at least $1.00. Excited for what this company has in store!

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bgting :

My thoughts on this business ...

1. Low margin, or at least low gross margin, is a characteristic of this business. It is sort of a trading business, ie, trading electronic components. It buys and keeps stock from its suppliers and sell to customers, making the difference.

2. The products are somewhat like commodities. Customers will try to buy the same part from the lowest cost supplier. However, the main source of competition is not only related to the same part but rather another solution that can achieve the same function from another supplier. For example, the customer may choose to design-in a solution from TI rather than ADI. It could be due to cost, sales support or design support etc. Then the business could have gone to, say, Serial System or even TI itself.

3. If the customer gets big enough, the suppliers may wish to handle the sales and support by themselves.

4. It's stated in the announcement that its relationship with ADI goes back to 1987, so this doesn't look like something new. It isn't very clear what the improvement in the relationship is about and what the impact is. Probably an expansion in territory? Or maybe ADI is outsourcing more tasks to Excelpoint? However, ADI is just one of its numerous suppliers.

5. If a salesperson can book a sales for 1 million parts, it doesn't take two to book a sales for 2 million parts from the same customer if business is booming. So during an up-cycle, the top and bottom lines should grow faster than expenses. This means the net margin and hence profits should improve substantially. This is a characteristic of a marginal business.

6. During an up-cycle, larger orders from customers come in. With larger orders, cash is required to build up inventory to hold for customers. The company uses credit from suppliers and short term loans to fund the inventory build up. This causes current liabilities to increase. As goods are delivered and customers are billed but payments are not received yet, accounts receivable also increases. Thus, cash flow appears negatively impacted. This seems to be what is happening.

7. As conditions stabilize, the inventory build up should slow. As payments from customers come in, payments to suppliers are made. The leftover are cash earnings. The high leverage will make the ROE look good as net margin improves. Gross margin may stay low or may go even lower because customers will request for lower prices for higher quantities.

8. As the cycle turns down, orders falls. If the company is alert to this, it will wind down the inventory level. This would mean cash build-up as inventory is converted into cash. This will make the cash flow look good.

9. However, if the company is not alert enough or the cycle turns suddenly, we can imagine all sorts of risks such as counter party risks due to late payments from customers and customers defaults, inventory obsolescence that needs to be written down resulting in losses etc.

10. The competence of the management lies in management of these risks while deriving an adequate return.

11. For such a cyclical business, it is quite usual that market gives a larger discount to the share price. The lack of interest in the stock could be because there were those who were caught out in previous cycle peaks and learnt the lesson the hard way. Some may even be hoping to exit when share price goes up. However, if the business expansion and bull market lasts long enough, net profit and dividends should start to look good. This may garner market interest, until the cycle turns yet again. Long term shareholders who are willing to ride through the ups and downs have to depend on dividends for returns over the years.

From the look of it, it does imply that we're probably in an up-cycle. However, by looking just at one company is not good enough to pass such as a strong judgement. Hope this cycle lasts a bit longer. These are just some of my thoughts and I am not from this industry, so can't be sure how correct I am. I'm currently not vested. DYODD. :-)

fiftysevenbucks :

Reply to @bgting : could not agree more with you. I have divested my holding the next day after the result out due to low margin.

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seanie :

@salvatore what are ur plans for excel

seanie :

Reply to @Salvatore : Seems like a lot of people selling out... as the price slides day by day.. just like the last results

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lt_investor :

Looking at how Venture, AEM, Hi-P, Fisher Tech, valuetronics and even Jadason had been rising but not excelpoint, i started to be aware. Like what i mentioned previously, if under a bull market the price is not moving up, what do you think will happen in a downturn? Currently i am still vested with 40 lots which i am looking at opportunities to sell within the next few days. Somehow my fear and not confidence in this stock grow everyday. Just my view.

seanie :

Reply to @lt_investor : Nice one... excel facing much selling pressure.. think not good at all

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wellhandy :

Judging from TTI comments, Albert and friends are honest and focused people who concentrate on biz more than valuations. This is test for long term value and growth investors who are believers.

seanie :

Reply to @lt_investor : Ouch... guess the pressure will be on excel then

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J_Chou :

I think I have learnt a valuable lesson with regards to SGX today.

LevelUp :

Reply to @J_Chou : Perhaps it's more of instant gratification rather than impatience. I am sure most people will prefer to gain x% within one month, as opposed to having to wait 1 year to get the same returns.

It's good to exercise different levels of patience for difference scenarios (be it investing or in life) ... learn to enjoy the process while waiting, but don't procrastinate when a good opportunity strikes!

As for the dividends, I have not really checked for Excelpoint but I guess the senior management probably owns a sizeable chunk of shares too. By declaring dividends, they are getting some good dividend income too ;-)

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korryan :

Maybe we need to pool money to invite some analysts to do a well coverage on them. Haha.

lt_investor :

Reply to @korryan : Should propose this to company management instead.

uncle178 :

This stock is so under-radar that even good results don't move it!

lt_investor :

Good analysis and the write up. However like what i mentioned previously, as long no recommendation from the bank or brokerage this stock will not fly. Good examples are AEM, Best World etc.

Opportunistic_Investor :

cash flow personally doesn't meant much to me if earnings wasn't increasing a lot.

in fact need to worry when cash flow jumps but profit dint jump. :P

handsomeuncle :

Reply to @Opportunist : As an auditor before. I worry more if profit jump but cashflow does not.

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Strong Growth and Special Private Placement with Synergy make Excelpoint Irresistible

Excelpoint Technology (BDF) has been a hidden gem whose intrinsic value will be uncovered soon. From my calculations, it is going to be a 6-bagger if its strong growth can be sustained. It will be at least a 2-bagger if just maintains its current level of earning ability with zero growth I will hold it till it reaches at least $1.85 as I would wager that it will be a 3-bagger hands down by end of September 2017.

Solid Performance in 4Q2016 and FY2016
Its net profit after taxation in FY2016 grew 62% compared to that in FY2015. It looks like its profit growth has gained momentum as its net profit after taxation in 4Q2016 grew even more solid at 128.2% compared to the same quarter in the previous year. Also, Singapore NODX accelerated by 21.5% in February from a year ago to extend its growth into the fourth consecutive month, boosted by both electronics (+17.2%) and non-electronics (+23.3%). This supports the view that the manufacturing and trade momentum remains strong, and will continue to lead and support growth in 2017 and companies like AEM and Excelpoint are on the cusp of their growth trajectory.

At the closing price on 21 Mar 2017 of $0.615, and take 1 US$=S$1.3963,
NAV = 80.9 cts
Dividend = 4 cts
EPS last FY = 9.29 cts
p/e = 6.62x
p/b = 0.76x
yield = 6.5%
PEG ratio = 0.107

How solid is this set of results if Excelpoint is to just maintain, not improve, its business performance? I simplify it as follows based on its closing price of 61.5 cts per share.
For every S$1 market value of Excelpoint, it will make 19.9 cts if the 4Q2016 earnings can be repeated in all the 4 quarters in FY2017. And if the same dividend payout ratio is to be given, the current yield of 6.5% will be increased to 8.57% in FY2017 if the market price per share does not change till the next dividend payable date. I cannot possibly ask for anything better than this as it is much better than CPF special account rate of 4%. And I know I can get more than 8.57% if there is growth in its FY2017 performance!
The company has yet to declare the dividend payable date and from past records, it is likely to be at the end of April or the beginning of May. If you invest in the stock now, you will get to reap the 6.5% yield soon.

The Group CEO showed confidence in his company
On his outlook for the new financial year FY2017, Group CEO Albert Phuay said: “The electronics industry will continue to see more opportunities arising, especially with the announcements of new developments in the recent Consumer Electronics Show 2017 by global leaders. With many government projects kick starting and the recent spotlight on the Internet of Things, we see increasing demand for our solutions and products. We have recently set up a lab in India to enhance our value-added services in applications designing so as to strengthen our positioning. We are also actively seeking more product lines to broaden our offering. Notwithstanding the challenging business environment, the Group will continue to capture new business opportunities and focus on delivering sustainable growth.”

No Insider purchase? Look deeper!
We should all know that insider purchase or company buyback of its own shares speaks volumes about the confidence displayed by the management on the prospects of the company. However, the insider purchase made on 29 Feb 2016 was a bit too long ago and only S$3,300 was involved.
There was an issuance of 15,000,000 new ordinary Excelpoint shares to Alonim Investment Inc. by way of a private placement at S$0.525 per new ordinary share on 5 October 2016. This amounted to S$7,875,000, which is about 12.77 % of the number of enlarged voting shares in the capital of the company.

Alonim Investments Inc., a Canada company, operates as an electronics manufacturing firm and it produces and supplies electronic components and accessories. So, Alonim Investment Inc. is in the same industry as Excelpoint and it should know the significance of the purchase and the synergy between the two companies. What was intriguing is the purchase price of S$0.525 apiece is 41.9% higher than the market price then. Does Alonim Investment Inc. know something that Mr Market doesn’t?
It also shows that the Group CEO valued his company much higher than Mr Market did then and this was all before the announcement of its stellar 4th Quarter results on 15 Feb 2017. I take this confidence displayed by the Group CEO as more important and significant than insider purchase.
The company also just announced on 21 Mar 2017 that the Directors will propose that the share buyback mandate be renewed at the forthcoming AGM to be held on 5 April 2017 --- a very positive move to help all shareholders to enhance the value of their shares should Mr Market underestimate the shares by a huge margin.

Company is in expansion phase with solid earnings
The cash flow of the company shows that it has been borrowing money to create more earnings for its shareholders. The EBITDA/Interest Expense is at a healthy 4.531x at the end of FY2016. This is a typical characteristic of a growth company. When the company’s expansion reaches a steady state and it stops borrowing from banks to finance its expansion, the savings in interest expenses should turn into positive cash flow and more earnings in favour of the shareholders.
The fact that it can generate solid p/e and give solid dividends shows that the management has the shareholders’ best interests at heart.
The bulk of its revenue has come from China and it is definitely a scalable business. Its revenue has been growing which shows the strong demand for its products and services.
Also noteworthy is that Excelpoint signed a partnership with Tata Elxis as its software partner, as well as obtained the distributorship of Xilinx in India in last November to enhance its solutions offering and this has allowed it to expand its footprints in the region. Also, its R&D team has developed new products like wireless audio and headsets, offering the company ample room for growth. To capture opportunities in the IoT segment, it has set up a dedicated team with the expertise and market knowledge to design solutions that can be applied to a broad range of applications.

Poor liquidity of its shares can be a strength
The market capitalisation of Excelpoint is around $72.3m based on the closing price of 61.5 cts on 21 Mar 2017. The two top shareholders, Albert Phuay and Alonim Investment Inc., together own about 53.2% of the total voting shares of the company and the balance 46.8% shares are worth only about $33.8m dollars. It is quite difficult to accumulate the shares of Excelpoint without pushing up its price due to its illiquidity.
But the illiquidity can be taken as its strength too as there is no need for a big volume to push its share price through the roof. What is important for buying an illiquid stock is that it must be an undervalued gem and you must be prepared to hold it for the long haul till Mr Market uncovers it.

What can happen to such a high growth company?
Like AEM and Best World which I have uncovered in my earlier posts, it is likely that Excelpoint may announce bonus issue if their growth in earnings can be sustained. As aforesaid, it will propose in coming AGM to institute share buybacks to enhance the value of its shares to reward shareholders.
Best of all, it can easily be a takeover target for its superb earning power and its small market capitalisation.

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