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Multi-chem continues to bleed for another quarter

I talked about ECS and Multi-chem, IT distributors cum system integrators or after sales providers that could have issues due to them not being stockist.

I realize I was late in that they reported their interim financial report.

You can view report here.

This small stock is really seriously thinly traded. The spread is damn wide.

  • Revenue and gross profit growth was stagnating, but COGS outpaced revenue
  • Selling and distribution costs was inline
  • The main bugbear was the Administrative expenses. 44% increase. The main reason I feel causing this 2 quarters of profitability issues
  • Operating Cash Flow Before working capital is strong. Half year cash flow is able to fulfill the full year dividend of 8%.  Factoring in working capital and income tax and the free cash flow becomes negative
  • Beauty of this business is no need for much capex. This  balance off with the investments in administrative expenses
  • Cash on hand fell 10% from 44 mil to 40 mil

As Rayson the financial controller of Multi-chem have stated (contactable > [email protected]) , you have to invest  in training staff for support, training and other after sales, or ramp up for new products that you distribute.

Even if your sales is down, you will still need to invest in this aspect. Else when you get the sales, you cannot ramp up.

It would seem that this administrative expense looks like Multi-chem’s capex.

Perhaps it is just a sales blip of 2 quarters. Multi-chem distributes around the region. The business is competitive. The margins are low.

Market Cap = 47 mil

Net Cash = 38 mil

EV = 47-38 mil = 9 mil

This looks a value proposition in that there are years where the Multi-chem profit is 6-8 mil in a year. Free Cash Flow of 2-3 mil in a year.

A purchase at this price, you could probably recuperate your investment with 3 good years of free cash flow.

The price Mr Market priced it at seem to indicate

  • Competitive business with no moats that they will collapse overnight
  • Lukewarm profit and cash flow outlook
  • Low liquidity in the stock

Is there a mispriced? I am not sure. The sales network is extensive, and the IT purchasing will definitely see better days next time.

Would Multi-chem be around to take advantage? I certainly think so, provided they can tide through this period of low revenue growth and manage costs and operations well.

Likewise your purchase price may not factor in the scenario that 25% of the cash is use as working capital. Economic conditions and poor management may just remove 10 mil cash. Your current purchase price may not look hat cheap considering the low profit growth.

You get an advantage if you are in the IT industry and have extensively deal with vendors like this.

I run a free Singapore Dividend Stock Tracker available for everyone’s perusal. It  contains Singapore’s top dividend stocks both blue chip and high yield stock that are great for high yield investing. Do follow my Dividend Stock Tracker which is updated nightly  here.

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