Multi-Chem's 2Q results - unexpected disappointment

Performance at first glance

While revenue and gross profit remain flat, profit plunged 183% against 2Q 2007 to end with a loss of 1,255m SGD. Given the world wide electronic slump, poor performance is expected but a loss is obviously not expected. Furthermore, Multi-Chem have two drivers of earnings, its struggling PCB drilling segment and a healthy IT security products distribution via its group of M. Tech companies (Mtechpro). The latter should have provided a cushion to the plunging profits.

A closer look

The sudden plunge in profit is actually due to a provision of bad debt, to a staggering 3m SGD (2.966m to be exact). Given that quarterly profit of Multi-Chem normally reached 1.5m, without the provision, profit could have remained flat (i.e. far from making a loss!).

The 3m of doubtful debt is attributed to 2 PCB customers in China. Given that the revenue attributed from China is 8.5m in 2Q 2008, against 8.4m in 1Q 2008 and 6.8m in 2Q 2007, the 3m in doubtful debt is indeed very significant! This brings me to wonder the risk profile of the customers Multi-Chem had OR the quality of the earnings reported in earlier quarters.

Sunshine beyond the storm?

Assuming that the provision of bad debt is a one-off "unlucky" event (I will watch this carefully, else I will issue myself another uncle warning). A look at their reported cash flow statement still show a strong cash generated from operations. So the warning light is still off, for now.

Segment review

PCB drilling

While the electronics sector is Singapore is still gloomy with no sign of recovery, the situation in China is still encouraging, at least for now. Revenue from PCB drilling in China improved 24.6% from 6.8m in 2Q 2007 to 8.5m in 2Q 2008. This includes a significant jump in revenue from laser drilling, i.e. from 0.19m in 2Q 2007 to 1.5m in 2Q 2008. Laser drilling is attributed to higher demand in handset PCBs while mechanical drilling is attributed to the automotive, computer and server PCBs.

IT security distribution

After several quarters of breakneck growth, this segment began to show signs of slowing down. However, given the fact that Mtechpro only recently expanded into India and Taiwan (and now into Australia), Mtechpro's still have many subsidiaries in their infancy. Once these centers become as matured as those in other parts of Southeast Asia, their revenue (and consequently profits) contribution to Multi-Chem will continue to augment that from PCB drilling.

Conclusion

Baring unforeseen circumstances, I am still hopeful Multi-Chem's potential is good beyond the dark clouds. Once the electronics cycle start to make a upturn some years down the road, their true potential will be shown, not forgetting the significant contribution from the Mtechpro then.