AWC- a cheap smallcap

Background

AWC Berhad (“AWC”) is involved in the provision of engineering services and integrated facilities management solutions in Malaysia, and rapidly expanding in Singapore and the Middle East. Its four core businesses are:

1. Facilities – provides “one stop” integrated facilities management services to building owners.
2. Engineering – leader in Building Automation System and specializes in heating, ventilation and air conditioning control systems (HVAC), hydronic balancing system and industrial cooling system.
3. Technology – provides turnkey research & development for micro electronic software products, consumer electronics products and security related products.
4. Environment – Proprietary brand STREAM, uses the breakthrough automated pneumatic vacuum technology for waste collection.

Recent Corporate Development

Yesterday, AWC announced a capital reduction scheme which was intended to wipe out its accumulated losses of RM45.8 million as at 30/6/2009 (or RM43.9 million as at 30/6/2010). The scheme involves the cancellation of RM0.20 from the par value of each ordinary share of RM0.50. Upon completion of the scheme, the outstanding shares will remain unchanged at about 228.679 million units, each with a par value of RM0.30.

The accumulated losses arose when AWC took over an ailing listed company, Trans Capital Holdings Bhd ('TCHB') in 2003. That was part of a restructuring exercise & from here, AWC ended up with TCHB's accumulated losses of RM80 million as at 30/6/2003 (which was slowly reduced to RM43.9 million as at 30/6/2010).

The proposed capital reduction scheme is nothing more than an accounting exercise to clear out a unpleasant blot from its Balance Sheet.

Recent Financial Results

AWC's net profit increased by 33% q-o-q to RM3.2 million on the back of a 29.5%-increase in turnover to RM66.7 million. Compared to the previous corresponding quarter (QE30/6/2009), AWC's net profit dropped by 26.1% despite an increase of 70.0% in its turnover. The seesaw movement in its top-line & bottom-line is due to a sharp drop in the company's profit margin due to increased sales from lower margin businesses.


Table: AWC's last 8 quarterly results



Chart 1: AWC's 8 quarterly results

Financial Position

AWC's financial position is very healthy with current ratio of 2 times & gearing ratio of 0.09 time as at 30/6/2010. Its cash balance stood at RM49 million or RM0.21 per share!

Valuation

Based on its close of RM0.23 yesterday, AWC is trading at a PE of 4 times (based on last 4 quarters' EPS of 5.72 sen). At this multiple, AWC is deemed quite attractive. As a smallcap, AWC could command a PE multiple of 6 times.

Technical Outlook

Over the past 2 years, AWC has risen from a low of RM0.06 to a high of RM0.36. The stock is still in a downtrend, where the price movement can be fitted into a 3-fan trend line. An upside breakout above the RM0.30 could be the start of an uptrend for this stock. The horizontal support levels are at RM0.20 & RM0.23 while horizontal resistance levels are at RM0.33 & RM0.36.


Chart 2: AWC's weekly chart as at Oct 4, 2010_plotted on log scale (Source: Tradesignum)

Conclusion

AWC is a relatively cheap smallcap, which was unfairly knocked down by the announcement of a capital reduction scheme yesterday. I view this scheme as nothing more than a housekeeping exercise to clear out a blot in its Balance Sheet. The sharp drop in the share price could be an opportunity to get into the stock as a lower price.