· Almost invisible micro stock. Recently, we visited an interesting ACE Market stock, Mikro MSC Bhd (MIKROMB) following the rally in its share prices accompanied by heavy trading volume. Listed in end-2005, it has gone almost unnoticed to most investors for the most obvious reason of being a micro-cap stock, which have been making a couple of millions net profit annually. However, if one were to take a closer look beyond the small profits, MIKROMB has been profitable so far and had grown its net earnings from RM2.2m in FY05 to RM5.6m last year with net margin close to 20%. In addition, it is a net cash company and this is fairly impressive for an ACE Market stock.

· A home-grown company. MIKROMB was formed during the Asian Financial Crisis in 1997 to design and manufacture electrical distribution equipments, such as overcurrent relays, earth fault relays, earth leakage relays, power factor regulator and etc. Despite being locally built, MIKROMB’s products are able to match foreign competitors in quality at competitive pricing. This is largely attributable to its 10- member in-house R&D team, which is led by one of the company’s EDs. Today, MIKROMB’s equipments are not only used in Malaysia for notable projects like KLIA2, KLCC and IJN, but also used in Singapore’s MRT Stations and Resort World Sentosa, and Doha International Airport, to name a few.

· Steady earnings since listing. MIKROMB has been registering an unbroken profit track record since listing in end-2005, albeit making small profits each year. From a net profit of RM2.2m reported in FY05, the earnings have grown to RM5.6m in FY14. In these nine financial years, MIKROMB only saw four years with small decline in earnings (the highest was an 8% drop). In fact, MIKROMB crossed the RM5m net profit mark for the first-time last year. In FY15, it expects to hit another record year as the 1H15 net profit of RM4.2m which surged 62% YoY, is already three-quarter of last year’s earnings. A positive point to note is that MIKROMB’s net margin which is close to 20% is considered fairly decent largely attributed to its strong R&D team. Meanwhile, c.35% of its products is for export markets to 14 countries.

· Exciting earnings prospect. As electrification is a necessity in today’s society, demand for electrical distribution equipments is a given, be it new markets or replacement markets. Any new infrastructure projects, property development projects or even new schools and hospitals; these are the potential market for MIKROMB. Given its track record in Singapore’s MTR project, it could stand a fair chance to be involved in the MTR and LRT extension projects locally.

· But premium valuation. We project a strong 28% growth in FY15 and a lower 11% growth in FY16 for earnings. This implies PER valuations of 16.6x and 15.0x, respectively, which are not cheap as the FBMSC is only trading at 10x. While the impressive financial numbers look attractive, the rich valuations do not warrant an outright buy recommendation. Hence, we rate the stock NOT RATED for now. On dividend, based on same payout as in FY14, we expect 1.0 sen NDPS in FY15, yielding c.2%-3%.

Source: Kenanga Research - 28 May 2015