SOLUTN ( 0093) FUNDAMENTAL ANALYSIS

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SOLUTION

Period	ANN FY2014	YTDQ22014	31/12/2013	31/12/2012	31/12/2011	31/12/2010	31/12/2009	31/12/2008
Revenue	23,604,000	11,802,000	12,648,270	7,861,480	11,316,030	18,092,310	13,090,000	11,928,000
Gross Profit	9,384,000	4,692,000	5,999,360	2,911,860	4,052,980	5,137,160	5,013,000	3,455,000
EBITA	4,886,000	2,443,000	1,423,360	(2,212,630)	778,440	2,837,440	3,218,000	1,142,000
PAT	3,154,000	1,577,000	764,170	(2,212,630)	266,380	2,021,720	3,130,000	993,000
EQUITY	29,144,000	26,701,000	24,926,220	20,096,740	22,210,590	21,817,050	21,686,200	19,814,000

SUMMARY

I am Positive on this counter and am long at RM0.205 and planning to collect more if dipped.

Here are the reasons why I committed money into this counter:-

1. SOLUTN in FY2014 expected to achieve revenue of at least MYR23m (FY2013- MYR12m) and net income of MYR3.15m (FY2013- MYR764K)

2. The basis of the achieving MYR23m revenue and income MYR3.15m income are basis on the following:-

1. Refer to announcement dated 5th May 2014 and 13th June 2014, totaled order book = MYR40.1m of which MYR29.8m expected to actualize in FY2014.
2. YTD Q2 FY2014 already recorded MYR1.57m
3. Revenue in Q2 FY2014 recorded 90% increase from previous quarter and basis the announcement made on 13th June 2014, the increase can be sustained (i.e. not one off increase).

3. Base on the following events SOLUN is likely looking at M&A and a deal might be imminent:-
1. Refer to announcement dated 5th May 2014, SOLUTN is looking at M&A with 3 potential companies and still in negotiation stage.
2. A series of corporate exercise takes place
1. ESSOS of no more than 30% of the paid up capital approved in 2nd Jan 2014 (first time since listing in Jul 2005) & subscription price = MYR0.135
2. A total 1,881,000 shares were listed on 5th Sep and 7th Oct of which 3 directors subscribed to 1.7m shares. Refer to announcements dated 8th Sep and 8th October.
3. ESSOS subscription were exercised post Industronics Berhad disposed all their shares on 28th April 2014, in fact announcements that has positive impact to SOLUN earnings were made after Industronics Berhad full disposal.
4. A new direction is required after Industronis exit
4. SOLUN balance sheet though small but it is well managed such as low dent and highly liquid.
5. Base on their balance sheet composition especially its noticeably low liabilities, SOLUN is not in need of additional funds, its current cash flow and working capital is more than adequate. Refer to Balance Sheet analysis at below.
6. This give rise to the question of why did SOLUN proposed ESSOS which the company could raise up to MYR7.5m new funds. This further fuel the idea of potential M&A or for an upcoming big project that requires a lot of fund.
7. Note of caution the biggest drawback of this Company is its erratic and inconsistent revenue and net income. However on slightly more positive aspect on this are
1. at least this FY2014 is expected to record MYR29.8m and
2. FY2015 has secured MYR10.3m order book.
3. Increasingly positive outlook on higher sales + new product launched in Q4 FY2013
8. Conservatively tagging P/E of 17x the expected target price basis annualized FY2014 result @ MYR3.15m = MYR0.285 and its PBV at 1.9x is reasonable as well.

INCOME STATEMENT ANALYSIS

• Revenue and net income over the last 6 years had been erratic, aggregate net income since 2008 = MYR4.9m which is weighted down by net loss in FY2012 (MYR2.2m loss).
• Losses incurred in FY2012 was the result of writing off R&D expenditure as it is no longer commercially viable.
• Positively FY2014 is expected to record MYR3.15m net income and account to nearly 2/3 of the last 6 years net income.
• Net income in last 3 quarters are in the region of MYR440K – MYR1.1K vs earlier quarters below MYR50K
• The key to sustain profitability lies in their order book and the following were gleaned from their quarter report:-
• Q4 FY2013 – B1, B2 & B3 – New product account for 40% of the Group revenue + strong order book
• Q1 FY2014 B1, B2 & B3 – Higher order book mainly locally (Msia), Africa, Middle east and SEA + receive significant sales order from its distributors in 30 countries.
• Q2 FY2014 B1, B2 & B3 – Higher sales of SOLTEQ equipment reason for the jump in sales revenue by 90% (M-o-M) + continue to receive significant sales order from its distributors.

BALANCE SHEET ANALYSIS

ASSET STRUCTURE

• Total assets grew by 18% to MYR30m in FY2013 and in Q2 FY2014 grew by another 11% to MYR33.2m.
• In FY2013 the 18% growth primarily came from intangible assets and trade receivables while in Q2 FY2014, the 115 growth were driven by trade receivables nearly double to MYR14.6m from MYR7.6m.
• The intangible assets are development cost for various software and equipment which includes development costs for 2 local universities projects.
• Intangible assets tripled to MYR2.1m from MYR495K implies potential order book especially development for 2 local universities.
• Increase in Trade receivables is expected as it is in tandem with the growth in revenue.

LIABILITIES

• Total liabilities recorded at MYR5.3m in Q2 FY2014 represent an increase of 46% from FYE2013. The amount is still noticeably low as its debt ratio is 16% and its Debt to equity at 20% is eye catching as well.
• Bulk of the liabilities are derived from trade payables (MYR3.3m) which accounts for 61% of the total liabilities.
• Fairly low interest bearing loans.

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