Traded Armarda for Manufacturing Integration Technology, 8th June 2007

With the recent run up in Armarda's share price (from my averaged cost of 5.2 cents per share) to a intra-day high of 16 cents. At 16 cents, Armarda is grossly overvalued under present business performance. However, factoring the unknown potential in profit contribution from its recently announced FESCO joint venture, there might indeed be a huge upside potential.

I have to reconsider my options carefully. It's either I stick to Armarda and wait for the impending turn around in business for the better, or I trade some of it for another undervalue stock. After serious consideration, I decided to lock in some profit and acquire another value stock. The problem is, in this bull run, it is difficult to find another undervalue stock with sufficient margin of safety. My holding's of Armarda had actually tripled in value. If I trade 1/3 of it (pure profit) for another stock, I think I could risk having a lower margin of safety. Thus I sold off 1/3 of my holdings at 16 cents, which happen to be an intra-day high (actually there were 2 one lot trade done at 16.5 cents). Armarda eventually close at 15 cents.

My continual stock screening effort already identified a few potential acquisition targets, one of them is Manufacturing Integration Technology (MITech). It came to my attention on the 8th April 2007.

Business
MIT is essentially have 2 main businesses

1. Manufacturing: Designing, developing and manufacturing of automated equipment for semiconductor industry. (profit contribution about 90%)
   
2. Distribution: Distributing automated equipment for semiconductor industry. (profit contribution about 10%)

Its revenue is evenly contributed from 3 main geographical sectors:

1. Singapore (32.7%)
2. Asia (36.7%)
3. Europe & USA (30.6%)

What makes MITech attractive is that for a high capex business such as equipment contract manufacturing, MITech was practically debt free, i.e. ultra low gearing (0.01x). In fact, this was MITech's business strategy to grow the business while keeping debt low. The following were quoted from its Annual Report in 2005 and 2006 respectively:

...we have consistently adopted an asset-light strategy to stay nimble in the highly competitive and ever-changing business landscape...

...management team had consciously worked hard to achieve strong earnings and maintain a solid balance sheet through stringent cost controls, prudent capital expenditure and cash flow management ...

Potential
Going forward, MITech hoped to diversify their business from narrowly focused semiconductor equipment manufacturer into a broader equipment contract manufacturing house. Their main focus will still be semiconductor equipment manufacturing as the diversification merely seek to stabilise earnings for sustainable growth. With its strong balance sheet, it hope to achieve this via merger and acquisition. It had already done so recently (all funded with internal resources):

1. Acquisition of a 70% interest in Right Industrial Systems Engineering (RISE). RISE specializes in providing wet bench equipment for wafer fabs and air pollution control systems for the different industry uses.
2. Acquistion of 100% interest in AMS Biomedical Pte Ltd ("AMS") in 24th May 2007. AMS Biomedical (AMS) is a Singapore-based contract manufacturer focusing on manufacture of complex electro-mechanical equipment and devices for medical industry.

Valuation
Using residal income model and using business results in 2004 to 2006 as an anchor, I forecasted the earnings for 2007 and 2008 without considering the potential business contribution from acquiring AMS.

Business Forecast and valuation (SGD $‘000)

	2004	2005	2006	2007(F)	2008(F)
Revenue	51,438	53,676	55,523	55,823	58,056
Income (Sales)	8,170	7,110	7286	6,603	6,030
Profit margin (Sales)	15.88	13.25	13.12	11.83	10.39
earnings per share (EPS)	3.71 cts	3.23 cts	3.30 cts	2.99 cts	2.73 cts
residual earnings	NA	1.82 cts	1.59 cts	0.90 cts	0.82 cts

Assumptions:

• required rate of return = 10%
• revenue growth in 2007/08 = 4% (avg)
• overall expense growth in 2007/08 = 5.7% (avg)
• perpetual growth thereafter = 0%

I hence arrived at a valuation of 34 SGD cents, an upside of only 36% from my acquired price of 25.5 SGD cents. (I normally look for at least 70% upside as a margin of safety).

Reservation
However, all is not rosy. One unsettled alleged patent infringement law suit stains the otherwise beautiful picture of a quite clearly unvalued gem. As quoted from its annoucement:

The Company wishes to announce that it has been served with a writ of summons issued by the High Court of Singapore for its alleged infringement of a patent involving certain equipment part used for one component of its business.

The Company is seeking professional advice on the alleged claim and will be entering an appearance in the matter.

The Company is of the opinion that the alleged claim and its outcome will not have any material impact on the financial results of the Company for the financial year ending 31 December 2006 as well as for the 2007 financial year.

In the unfortunate event that the company loses, will there be a potential of inviting more patent law suits in the future?