Putting Its Past to Rest
Intrinsic Value S$0.355
Prev Closing Price S$0.190
Global Invacom Group Limited (Invacom) seems to be putting its past to rest following the turnaround in its recent 1H FY13 results, successful rectification of the manufacturing business and penetration into the Asia region. The industry is tilting towards Invacom’s favor with growing satellite ground equipment purchases, increasing number of HDTV channels and smart TV ownership and need for more sophisticated satellite communication products. As such, we believe the company is poised to grow its revenue by approximately 18% in FY13 to US$110m and record PAT of approximately US$8.7m. Invacom is currently trading at an undemanding 3.9X FY14F P/E and 0.48X P/B vs the peers’ average of 20.4X and 1.8X. Recommend Increase Exposure with an intrinsic value of S$0.355.
Well-entrenched in the Sector: Invacom is one of the seven global suppliers of satellite television peripherals with a portfolio of more than 400 products. Its products are mainly sold to satellite service providers and used for transmission between satellite and dish. The recent purchase of The Waveguide solution (TWS) will enable Invacom to design and manufacture higher end and higher margin products, thereby leading to new markets and growth opportunities.
Reaching out to the Asia region: The company’s clients are mainly from the US and Europe such as Echostar, BSkyB and others. However, the company recently secured a sizeable order from a major Asian satellite pay TV player and is looking to grow its foothold in this region. Invacom has also upgraded its Selangor operations from sub-assembly to manufacturing to cater for future growth.
More demand from the customers: With the growing number of HDTV channels and smart TVs, increasing demand from consumers and rising trend of cross services between telcos, ISPs and broadcasters, there is a need for newer and more sophisticated satellite transmission products. We believe the industry is progressing rapidly and there are opportunities for Invacom to widen its sales.
Company Background: Global Invacom Group Limited (Invacom, formerly known as Radiance Group Limited) is one of the largest suppliers of satellite television peripherals in the world. The company is based in the United Kingdom and incorporated in 1988. It is involved in the R&D, design, production, marketing and distribution of satellite communications products, primarily to large-scale satellite broadcasters (e.g. Echostar, BSkyB, Hughes and DISH Network). Invacom has a portfolio of more than 400 products including very small aperture terminals (VSAT) low noise blocks, transmitters, transceivers, orthomode transducers, fibre optic products and satellite signal distribution equipment.
We can associate the company with Aztech in Singapore, which sells modems and routers for wireless broadband signals within a home. On the other hand, Invacom provides equipment that enables transmission between satellite and dish, primarily in the land and sea. Particularly, Invacom provides VSAT and direct-broadcast satellite dishes for residential purposes which are capable of offering wireless triple play solutions – television, internet and telephone. They also provide VSAT and fibre headend for residential apartments, which can receive television signals and distribute within the system. Such products are necessary for areas that have poor ground cable network, particularly the suburban parts of huge land-mass countries like the US and Europe.
Troubled History: Invacom was listed on the SGX through a reverse takeover of Radiance Group in 2012. The latter provides specialist electronics manufacturing services in satellite communications, TV peripherals, computer peripherals and consumer electronics industries. It has manufacturing facilities in Shenzhen and Shanghai - the former factory has an area of 6,000sqm and five surface mounting technology lines while the latter factory has an area of 11,000sqm and ten surface mounting technology lines.
Radiance Group (Radiance) was listed on SGX SESDAQ in June 2003 and transferred to SGX Mainboard in 2006. Invacom had a long and significant trading relationship with Radiance, accounting for S$40m revenue in 2010. The acquisition allows both entities to improve their supply chain, enjoy cost effectiveness and venture into the satellite communications and television peripherals industries. Another reason for the acquisition was due to the financial difficulties of Thumb (China) Holdings Group Limited, the controlling shareholder of Radiance Group, in 2008. The former was auctioned for S$10.5m to Invacom, which acquired it to protect its supply chain and triggered a mandatory general offer and thereafter, the reverse takeover. A compliance placement of 41.54m shares (gross proceeds of S$12.8m) was done on Sep 2012 to fulfill the shareholding spread (> 500 shareholders) and distribution requirements (> 25% of issued share capital must be held by public shareholders). The entire process took more than two years.
Following the takeover, the company guided a loss for its FY2012 results mainly due to a S$18.8m non-cash non-recurring write-off of goodwill (due to the reverse takeover) and expenses related to rectification of quality issues for the manufacturing of its satellite communications products. The latter, which was due to mis-calibration of equipment after an upgrading activity and led to re-working and replacement of products, dragged gross margin from 28.4% in FY2011 to 18.8% in FY2012.
Things have started to improve: In order to fix the quality issue, Invacom assigned an internal quality manager and external consultant to oversee and improve the work processes. Measures were also taken to retrain the workers on the correct use of recalibrated equipment and there was a stronger emphasis on quality. The quality issue affected three products ordered by a US client and the order backlogs were fully delivered in 1H FY2013. Operations have resumed to normal since then.
Building up the Satellite Communications Business: On the corporate development side, Invacom remains committed to growing the Satellite Communications business. During FY2012, the company secured a new dishes contract for BSkyB (an existing major customer in UK since 2010) and a substantial contract with a major Asian satellite pay TV player. The order from the Asian client will be fulfilled in early part of 2H FY2013 and we believe the company is well positioned to receive a subsequent order. At the same time, the company also shifted some of its manufacturing to Malaysia in FY2012 due to rising expenses in China and more business in the region.
Particularly in ASEAN: The move into Asia allows the company to reduce its reliance on key customers in the US and Europe and gain a footprint into Asia. Going forward, we expect Invacom to concentrate more on building up its presence in the region, particularly in nations such as Indonesia and Myanmar.
Invacom previously appointed a subcontractor in Selangor, Malaysia to assemble and dispatch its products. The company subsequently upgraded the Selangor operations from sub-assembly to manufacturing due to potential repeat orders in 2H FY2013 and potential growth in the region. That said, the company remains committed to expand its existing markets in the US and Europe.
And Moving to Higher Margin Products: Invacom also acquired The Waveguide Solution, a UK-based microwave waveguide transmission specialist which designs and manufactures higher end and higher margin components for the military, medical, aerospace and marine industries. This acquisition costs Invacom approximately S$9.3m, of which S$6.9m is paid via cash and the remaining in shares. We see this entity as a good enhancement to Invacom as it is a horizontal integration and allows growth opportunity within new areas. With Waveguide, the company can now strike for opportunities in the marine satellite communication products as Singapore is one of the biggest builders of offshore rigs. Invacom can also seek to sell some of the products in other regions, if the capacity permits. This entity contributed S$3m revenue and S$0.4m PBT for the last five months of FY2012, translating to approximately 9.7X annualized Price/ Earnings before Tax.
Glowing Satellite Communications Sector: Global satellite services revenue enjoyed a 9.3% CAGR over the last six years to US$113.4bn on the back of increasing number of HDTV and cable distribution channels and rising demand from consumers. The higher penetration rate of smart TVs, which is expected to soar from 66m units globally in 2012 to 141m units in 2015, will help to drive the broadcasting of HDTV channels further. These phenomena also propelled ground equipment purchases, which grew from US$34.3bn in 2007 to US$54.8bn in 2012.
Meanwhile, the sector is currently undergoing consolidation following SoftBank Corp’s acquisition of Sprint Nextel Corp, Dish Network’s 1.42bn pound bid for LightSquared and Dish Network’s collaboration with NCC Media. Vodafone’s US$130bn sale of its 45% stake in Verizon Wireless back to Verizon also sparked rumors of more acquisitions by the former. There is a growing trend of cross services between telcos, ISPs and broadcasters in the western nations (trending towards the likes of SingTel and StarHub) and that may spell some market restructuring and consolidation amongst the service providers. That said, we believe the trend is favorable for Invacom as newer and more sophisticated satellite peripherals will be needed by the network service providers to fulfill the multiple functions. The need for higher quality features coupled with complicated supply chain and uncertain industry dynamics are making qualified satellite communications product manufacturers scarce.
The entry of new products and services such as IP LNB (which can deliver eight concurrent channels from any of the transponders of a satellite orbital position), wireless IP networks and others are also creating new markets and new products, which provide opportunities for Invacom to grow and capture. In all, the sector is progressing rapidly and players will need to continuously keep up with the trend.
Impressive 1H Results: For 1H FY2013, Invacom posted 78.9% YoY rise in revenue to US$55m and 8X higher PAT to US$3.4m. The higher revenue was backed by 1) US$11.4m contribution from the Contract Manufacturing segment aka the Radiance Group and 2) US$15.2m contribution from The Waveguide Solution and Global Invacom Sdn Bhd. Administrative expenses increased less than revenue, by 64.5% YoY to US$9.3m and there was a US$0.2m gain on forex. Consequently, PBT rose by 3.5X to US$3.5m. Gross margin has recovered slightly in 1H FY2013 to 22.8% vs 1H FY2012’s 20.7%. Both half year results were still affected by additional expenses related to the quality issue such as air freight charges and stock adjustments. That said, gross margin should resume to the norm rate of about 28% once all these “extra” expenses are paid for. In our model, we adopted a more conservative 26% gross margin. We also expect Invacom to generate US$110m revenue in FY13 and US$121m revenue in FY14. We also conservatively set the profit margin for both years at around 7.7-8%.
Comparison with the Peers: We also included five of Invacom’s closest peers for comparison. Invacom trades at merely FY14F 3.9X P/E and 0.48X P/B compared to the peers’ average of 20.4X and 1.8X. Invacom’s market capitalization is also the smallest, at US$36.2m vs the peers’ average of US$438.5m. We reckon that the low market valuation and market capitalization make Invacom an attractive acquisition target.
Risks and Concerns: Whilst Invacom has a promising outlook, the company is subject to 1) revenue volatility as the orders are concentrated around a few key players, 2) technological risk as the sector is continuously revamping and coming up with new products and more sophisticated services and 3) there may be some operating risk due to upgrading of new equipment or manufacturing of new products.
Valuation: Based on the healthy 1H 2013 performance of US$55.3m revenue and US$3.4m PAT, we conservatively project US$110m revenue and US$8.7m for FY13. We assumed revenue growth of 10% for FY14-16 and 5% for FY17. FY14-FY17F gross margin and profit margin are projected to be around 26% and 7.7% respectively. We also anticipate the company to start paying dividends (1 US cent) in FY14 given the strong cash position then.
Our model did not include 1) any sector premium given the oligopolistic nature of the business which has only seven players, 2) rapid growth in the ASEAN region – our growth rate is mainly driven by demand for more sophisticated satellite communication products, 3) synergy derived from the acquisition of The Waveguide Solution and 4) potential acquisition.
In our economic profit model, we assumed 10.75% cost of equity to account for a slightly riskier operating environment while long term growth rate is set at 2.0%. The resultant valuation is S$0.355 per share, representing an upside of 87%. The valuation implies FY14F P/E of 7.2X and P/B of 0.90X which are still lower than the peers’ average.
We have also come up with a sensitivity table to gauge the volatility of our intrinsic value against changes to our forecast. In the worst case scenario of 12.75% cost of equity and EBIT margin of 7.5%, the value of Invacom will be approximately S$0.200.