ELSOFT 2019 Q3

1. Revenue and net profit dropped 58% due to lower demand of automated testing equipment (ATE) as explained by the management (On the positive side, its net profit margin actually maintain at 51%).
2. Elsoft reported a higher other income mainly due to forex gain and gain on fair value adjustment on other investment.
3. With lower revenue recorded, Elsoft also manage its administrative expenses with a drop of 27%.
4. Although the earnings dropped, Elsoft actually increase its dividend payout. Elsoft make 2.09 sen but payout 2.5 sen of dividend (Elsoft usually only pays about 70 - 80% of its profit as dividend). 

1. Elsoft remain as a company with no borrowings with a cash pile of RM63 million or net cash per share of 0.10 sen. 
2. Its inventories dropped from RM 5.7 million in previous year to RM 4 million as at Q3 2019 (Could this mean its business is experiencing further slowdown hence lower inventory level?)
3. When the sales is at RM 78 million its trade receivables is RM 14 million (trade receivables is 17% of revenue) , however in 2019, its sales is merely RM 27 million, its trade receivables is RM 10 million (trade receivables is 37% of revenue). 

1. Main reason for the drop in business is due to Malaysia based client. There is one single MNC client dominates 75% of Elsoft business in Malaysia (Obviously that client has purchased lesser testing equipment this year).

1. The company expect the demand remain weak and the situation remain challenging. 

Comments

1. The weak revenue reported is way lower than expected. The last time that Elsoft report a RM 4 million revenue in a single quarter was in Q2 2015. 
2. I think we could use the financial in 2014 as a reflection of Elsoft financial in 2019 - 2020. Its share price during that point of time is RM0.20. 
3. Assuming if there is another 0.5 sen of dividend being paid in Q5 which bring it up to a 3 sen dividend payout, at RM 0.9, its DY is merely 3.33%.
4. The average PE of Elsoft for the past 5 years is 17.5, hence at PE 17.5 and EPS of 3 sen, its share price is RM0.52. At 0.52, its DY is 5.7%

Weakness

1. Over rely on single client hence once the major client reduce its purchase, we will see a major decrease in sales. 
2. Over rely on single product - LED automated testing equipment, hence a drop in demand in ATE will cause a drop in sales.
3. Why would the demand for LED automated testing equipment for automotive and smart device drop when the automotive and smart device sales maintain? 

• Car sales in 2019 maintain at 600k vehicles however the sales of Elsoft dropped 60%? 

• Demand for smart device actually increased every year but sales of Elsoft dropped?