More on HYDRO and SMT.
Here are some more added value research notes on 2 high growth companies I like.
For HYDRO (12.20) the focus is on low risk operations and they are doing exactly this for already 30 years. Now joining up with UAC to support their customers with a separate company 50/50% venture. UAC is doing large Bio gass projects next year (over 1 Bill. Baht). Then will help HYDRO in the garbage in the water turning into electric energy. I sense UAC will be the big Bio Gas specialist in Thailand moving forward. DEMCO, HYDRO and UAC are my green picks for next year and with good earnings fundamental reasons supporting this.
HYDRO says the govt. backlog is +400 mill. Private backlog +300 mill. Baht. Plus some 700 mill. Bahty in progress. Plus a 2.4 bill backlog with huge water project in Chiang Mai. They sell their water at 10 Baht per unit which is below what the government charge which is 12.5. This is a long term project which will give HYDRO income for many years.
There are 70,000 municipalities in Thailand which potentially could use their system, so the potential market is huge. They can pay for it by charging 20% more for the water. Another on going example, is in Koh Samui. Here they have an installed a large desalination plant. They did a dirty to clean water project for big cap. CPF. Brief, this company has a long list of clients “who’s who” listed companies on the SET. The company states they do not have any serious competition as they are a total solution company -with low cost. Revenue growth should grow 30% next year and gross profit margin is stable at 20%. In the next 3-4 years the company expects to attract another 10 municipalities.
The company will have to do some capital raising next year so to finance its formidable growth. Cash flow and some lending can help as their D/E is low, but they will likely issue some free warrants before long. I told them to issue warrants at or near the money, as this being more shareholder value creating in my view, vs. new warrants convertible at a low price, i.e. deep in the money.
A very large Burma project (1 Bill.?) is very much in the making and they are confident of an announcement by end of December. When the warrants are announced and/or the big Burma project is, it will probably be time to take some profits as this stock has already nearly doubled since I first mentioned here in late August in our Member lounge. HYDRO’s stock is already trading at a high p/e of nearly 18 but with the leadership and high stable growth rate and all the fanfare it may well be justified. To my knowledge no broker here has written any research yet on HYDRO. (Also see my company visit report on this winner some 3 weeks ago.)
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SMT (10.40) has room to grow in the future and remains my core pick in the electronics sector. This is a pure growth stock and back on track after terrible (but fully insured) flood damage last year. SMT got listed in the SET in 2009. SMT has 1350 workers and over 100 engineers. This was lately cut down of late due to due post flood productivity improvement on all new machinery: more automized, better and with less workers and less rejection rates. SMT’s D/E is 1.
The flood insurance will pay them 2 Bill. Baht of which in Q. 4 for 800 mill. Turnkey solutions is now the focus. Their top 12 big customers have remained loyal and remain post flood havoc. The company is always looking for new customers. For their MMA products, 80% of their customers are back. For their micor IC products (new high demand, high volume), still a bit delay. Before flood 1.5 bill. pieces per year, this IC is very hot product for the future.
Many new machines have been installed and more coming into next year. RFID (tags) now just joined with a Japanese company (listed on Tokyo Stock Exchange), the number of workers per machine used to be 3 and now reduced to 1 (new machines). The number of workers at SMT has been cut in half due to massive new productivity enhancements. Resulting in higher quality and reduced costs, per piece. Also less mistakes, give more space and reduce workers, per machine.
TPMS is the new product which will be required in all cars in the future, these are tire pressure sensors which tell the driver in the car the air pressure of their tires. Many accidents are caused due to faulty tire air pressure. I think in the US this starts next year but am still checking on this. Maybe a member knows. SMT has 60 to 70% of that huge TPMS market for USA.
SMT’s main market remains USA and the company has a BOI tax privileges for 7.5 years. The potential flood is not to be a worry again as they now have a flood wall of 6 meters vs. the flood last year reached 4.2 meters. IN Q. 3 SMT has a carry over loss of 103 mill. but by next 1Q will have a carry over profit of 700. this from insurance proceeds. Before the flood labor cost were 6-7% and now reduced to 5%.
Overall SMT states it has "a 50% market share", in that past I used to ask this question with no answer and I am not sure on what market? Gross margins before flood was 4% and now increased to 5%. The company should earn per share the same amount (around 0.70 Baht) as it did before the floods hit -and when the stock price was in the mid tens.
Best Regards,
Paul A.Renaud.
