Thursday, November 1, 2018

The Tech Powerhouse Face-off

This article contains information (except the companies' name) from the 2nd Scorecard Newsletter written on 29 Sep 2018 for my Moat Scorecard subscribers. 

For the 2nd issue of Scorecard Analysis, I like to bring you attention to 2 Tech Powerhouse listed in SGX – Company A (Coy A) and Company B (Coy B).

As taken from their website, this was how they describe their business:

Company A

“We are a precision engineering group which specializes in manufacturing high precision front-end semiconductor components and perform complex electromechanical assembly and final testing services. Included in our core business is the production of modular and integration systems for original semiconductor equipment manufacturers. Aside from semiconductor industry, we also cater to other industries including in electronic, machine tools, aerospace and oil & gas industries.”

Company B

“Coy B provides handling and test solutions to the most advanced manufacturers in the world.  We help our customers deliver many of the most successful products in the 5G economy including microprocessors, high speed communications, IOT devices, and solar cells.”

Despite having slightly different business, they are technically in the same industry – the semiconductor industry.

As we knew, the Semiconductor industry has been a very hot and popular industry for traders and investors in over the last 2 years.

However, their share price has been dropping drastically. WHY? 

Company A

Company B
One of the reasons could be semi-related to the trade war. Investors might be worried that the trade war could potentially affect the future revenue of the semiconductor giants in USA for the long term. Thus, these investors could have sold their shares in these semiconductor giants.

With that in mind, it is important to note that Coy A and Coy B  main customer is actually a major US listed corporation.

Coy A – Company C (Coy C)
Coy B – Company D (Coy D)

So, could it be that Coy A and Coy B share prices were affected by the share prices of their customers?

Coy A (Red) and Coy C (Blue) Share Price Graph
Coy B (Red) and Coy D (Blue) Share Price Graph
Do note that only 1-year graph has been taken in view that relationship between Coy B and Coy D has only been 1+ year only.

From the graph, we can see that the co-relation between Coy A and Coy C is higher than that of Coy B and Coy D as Coy B share price has risen too much. This could be due to investor’s insane expectation of Coy B relationship with Coy D in the past. 

Despite having a high co-relation between Coy A and Coy C, another blogger (unable to disclose link) had actually stated that revenue of Coy C does not really affect Coy A. 

This meant that Coy A share price is potentially more affected by NEWs of its major customer rather than actual facts! 

As for Coy B, the share price could have fallen due to previous high expectation. After all, the company has already announced that their relationship with Coy D in the following year will not be as strong as the past years.

With that, does this mean that we should buy on dip? 

If that is the case, let’s see which company is actually better. I will be using the different scorecards to conclude which company is probably a better investment at this point in time.

Nevertheless, do note that each scorecard method is based on a certain strategy and even if the company did not pass that scorecard, it does not necessarily mean the company is not a good investment.

Full Analysis Scorecard

Company A

Company B
The Full Analysis scorecard is focused on looking for growth. It also looks for causes of concerns that investor should look out for as well as if the current share price is close to its value.

Overall the scorecard seems to deem Coy B as a more growth-focused company. In addition, Coy A seem to have more causes of concern. 

Aside to the revenue, net profit and operating cash flow graphs, it also seems to suggest that Coy B as more growth oriented as compared to Coy A graphs which are more consistent and flatter.

Winner: Coy B!

Ultimate Scorecard 

Company A

Company B
The Ultimate Scorecard is looking for companies that are undervalued at that share price base on a series of criteria. It gives a score to each of the criteria. By summing up the score, if a company scores more than 8 points, it is undervalued. Do take note that this scorecard also has a focus on cash related criteria.

Based on the value stock score, it seems that Coy A is more undervalued than Coy B. However, as per asset value, both of them are still priced higher than their book value. 

On the other hand, Coy B also seem to generate more cash than Coy A in recent years. This also relate backs to the growth Coy B is generating in recent years.

Nevertheless, based on the criteria listed, Ultimate Scorecard will have preferred Coy A.

Winner: Coy A!

Moat Scorecard

Company A

Company B
The Moat Scorecard is the latest addition to the scorecards we created. It mainly focused on qualifying something qualitative into a quantitative number. This will provide users to understand if the company has a competitive advantage in its industry. Do note that this number is not plucked from the sky. It is a conclusion of calculation of numerous quantitative figures of the company.

In view of the pictures above, the scorecard seems to suggest that Coy A has more competitive advantage as compared to Coy B. One of the reasons that Coy A could have a better competitive edge was because it has a more consistent and longer history with Coy C. As stated above, Coy B started its relationship with Coy D only for about more than 1 year.

This can also interpret that the relationship between Coy B and Coy D is not as strong as Coy A and Coy C considering the number of years they are together. Sounds like some relationship advice!

Thus, the Moat Scorecard deem Coy A as having more competitive advantage.

Winner: Coy A!

In Short

As per the 3 scorecards’ theories above, Coy A is the more preferred company. The main reason will probably be that Coy A has a longer and consistent working relationship with its main client as compared to Coy B.

This also bring about another factor that Coy A performance, in terms of revenue and net profit, has been flatter as compared to Coy B. It could also be an indication to Coy B’s investors of how the revenue of Coy B may continue if it continues to work closely with Coy D only.

Nevertheless, we should not discount the possibility that either company could find other major clients and break out of the cycle of working closely with only 1 major company.

For these 2 companies, it is also very important that they continue to innovate with more research and development. If not, their moat will probably be eroded soon enough in this time and age, and their share price will suffer as a result.

With that, I bring this newsletter to a close and hope you like what was written.

Please do your own due diligence before you invest this counter (if you knew what it is).

Confused with Coy A, Coy B, Coy C and Coy D? Then Sign Up with our Moat Scorecard using InvestingNote now!

If you are interested to know more about The Ultimate Scorecard or Full Analysis, do visit the Fundamental Scorecard website for more information! 

Oh... and do remember, please like our Facebook page (T.U.B Investing & Fundamental Scorecard) and follow me on InvestingNote.

3 comments:

  1. It considered a very good trader and with quite objective strategies of this medium.All of your blogs are up to date, i appreciate your work considered a very good trader. Keep going and update us with your latest and fresh blogs.
    KLSE stock Advisory

    ReplyDelete
  2. All of your blogs are up to date, i appreciate your work. Keep going and update us with your latest and fresh blogs.

    Share market calls
    option call put tips
    SEBI Registered Investment advisor`


    ReplyDelete