Highest return on equity over three years
Elsoft Research - Consistent investment in R&D bearing fruit
The stellar earnings performance of Elsoft Research Bhd over the past few years can probably be attributed to its consistent investment in research and development (R&D) activities.
The company’s policy of putting aside 10% of its revenue annually for such activities has certainly translated into higher returns to its shareholders.
Elsoft’s return on equity (ROE) to shareholders — at 37.17% in its financial year ended Dec 31, 2018 (FY2018), 27.89% in FY2017 and 35.01% in FY2016, translating into a three-year weighted ROE of 33.96% — was well above that of its peers.
This has resulted in Elsoft winning The Edge Malaysia Centurion Club corporate award for the highest ROE over three financial years among companies with a market capitalisation of between RM100 million and RM1 billion in the technology sector.
For FY2018, the company achieved a net profit of RM39.77 million — a 52.68% jump from the RM26.04 million posted in FY2015. The leap was even bigger at 97.5% when compared with the RM20.13 million it reported in FY2014. Revenue stood at RM78.15 million in FY2018 versus RM49.74 million in FY2015.
The higher earnings were buoyed by strong demand from the smart devices industry. Meanwhile, economies of scale achieved by a larger production scale in FY2018 helped to widen the overall product margin.
Given its continuous earnings growth, Elsoft was able to reward its shareholders with generous dividends at a payout ratio that was higher than its dividend policy. The company’s payout ratio has been in the range of 56% to 81% for at least the last five years.
The board has adopted a dividend policy of paying an annual dividend of not less than 40% of its annual net profit after taxation, on condition that such distribution would not be detrimental to its cash flow requirements, according to its 2018 annual report.
Elsoft declared four tax-exempt interim dividends for FY2018 totalling 4.59 sen per share, translating into a payout of 77%, based on its enlarged share capital after the issuance of new shares pursuant to a bonus issue and share split.
Notwithstanding the high dividend payout, Elsoft plans to build on its competitive advantage and remain focused on investing in R&D activities to drive the group forward.
Apart from its consistent earnings growth, the company has a strong balance sheet with zero borrowings — although some may not agree with having a “lazy balance sheet” without a single sen of debt.
The Penang-based firm was in a net cash position of RM72.48 million as at Dec 31, 2018, comprising RM10.19 million in cash and RM62.29 million in unit trust and bond funds as well as quoted shares.
The management remains optimistic about the group’s prospects for the years ahead, despite global economic uncertainties.
Noting that R&D activities will play an important role this year for both the smart devices and automotive industries, Elsoft says its ongoing R&D activities are focused on improving its existing products and on the development of new products for new applications from its customers.
R&D plays a vital role in business sustainability, ensuring the company remains competitive and stays ahead of the technology curve, it adds.
At present, the group’s R&D activities are mainly in the automated test equipment (ATE) for infrared/laser devices testing, next-generation ATE for the smart devices industry and new ATE for the automotive industry, Elsoft continues.
With solid fundamentals and a healthy financial standing, the group is confident that it will be able to take up new opportunities to broaden its customer base and product range.
Its share price has been climbing steadily, from 43 sen on March 31, 2016, to 93 sen on March 29, 2019, indicating a three-year compound annual growth rate of 29%. Its market capitalisation has expanded accordingly, from RM325.7 million to RM631.7 million in the same period.
The counter traded above the RM1 level for nearly six months from mid-June last year. It reached a high of RM1.40 in Sept 19 last year.
Over the past 12 months, the stock has fallen 15% to close at 99.5 sen on Oct 29 this year, valuing the company at RM665.13 million. Nonetheless, at this price, Elsoft is trading at a commendable trailing 12-month dividend yield of 4.38%.
See the other winners in The Edge Malaysia Centurion Club Corporate Awards 2019 here.