Is Alpha Technologies Corporation Limited a Value Speculator Dream ?

Here is some quick analysis on why Alpha Technologies Corporation Limited is a good company and might be worthy of a purchase.

Company profile

Alpha Technologies Corporation Limited (ASU) designs, manufactures and distributes a range of temperature and other sensors. Alpha Sensors Ltd is the parent company of Alpha Technologies Inc whose core business is the manufacture and assembly of temperature sensing equipment. Alphas main product range is a range of NTC thermistors which are used in medical, heating, air conditioning and process control applications.

Institutaional Ownership

Institutaionl ownership pushes a share price up or down significantly depending on the support. The names of the 20 largest shareholders of each class equity security as at 31 August 2005 are listed below.

Number of Ordinary Shares Held
1. FKM Holdings Limited (BVI) 223,360,571
2. Mr. Paolo Acconci 172,689,694
3. CAM Invest Sarl 50,000,000
4. Quest Stockbrokers 41,425,000
5. Mr. Taylor Fletcher 34,562,477
6. Westpac Custodian Nominees Limited 19,157,381
7. Citicorp Nominees Pty Ltd 15,653,116
8. ANZ Nominees Limited 11,880,937
9. HSBC Custody Nominees (Australia) Limited 9,856,365
10. Kanne Holdings Pty Ltd 9,511,371
11. Mr. Malcolm Reginald Stiles 6,066,667
12. Mr. Robert Mace Purdue 5,525,000
13. World Wealth Watch Pty Ltd 5,480,000
14. Acotex Far East Limited 5,333,334
15. Mr. Cheng Han 4,910,242
16. Mrs. Anne M Hollingsworth 4,168,699
17. Mr. Terence Bickerton 4,000,000
18. Mr. Lee Wan Hoi 4,000,000
19. Marekar Pty Ltd 4,000,000
20. Mrs. Maddalena Bickerton 3,900,000

It should be noted that there is some institutional support even for this very lightly traded share. It has ANZ, HSBC, Citicorp and Westpac. Apart from that it should be noted that this is a very lightly traded share that can swing greatly at times. While there are a lot of shares on issue it is rarely sold or bought without a large range between bid and offer.

Charting the stock

The chart shows a nice uptrend prior to the sideways trend which has been occuring for the last year.

Being such a small stock it is open to dramatic rises and declines and charting the stock is made harded due to the volitlity.

There is a definate level of support around 1.6c which shold hold in the near term with the increasing fundmentals hopefully pushing this share higher in the longer term.

Growth

Growth is a very important factor in share price movement and we need growth to make substanital gains. The following growth was achieved at the company in the lastest quarterly report (May 2006) :

• Sales were up 44% for the quarter ( like for like)
• Sales are up 20% on the YTD Figures
• Net Profit up 19% on YTD Figures
• EBITA was up 31% on for the quarter ( like for like)
• EBITA was up 13% on YTD Figures
• USA Turnover increased by 11.5%

The first thing to look at is where did this growth come from. This is explainable by delving a bit deeper into the numbers :

• The net profit margin was increased from 8.7% to 15% which shows they have increased efficiencies from either increased sales or cost cutting measures. I believe this was due to increased sales and low overheads by moving productionn to the asian region.
• The long term debt has decreased looking at the annual report from 2004 to 2005. It has almost halved saving interest costs and related expenses.
• This is a particularly good figure for Net Profit as last year had significant tax deductions which could not be claimed this year.
• They are expanding globally and have done a good job of setting up areas in the US, Europe and Asia. This should continue to grow their sales.
• The company attributes the growth to a better product mix and increased sales of medical equipment to major customers.
• They have bought out an italian company to expand the business in Europe. They currently have a 70% stake in the company. This will broaden theiur product range while still staying in their area of competence.
• The major reasons for the improvement in performance in 2004/2005 has been the improvement in margins through improved Quality Controls, better Production Planning and a significant reduction in Manufacturing Overheads in our Mexico operations and also by shifting more production to the lower cost China operations.

Future growth is as important as past growth. Furture growth for this company may come from the following areas:

• The Board of Alpha is still committed to strong growth through sales and acquisitions over the next three years with major emphasis on shareholders interests to achieve a significant improvement in the share price.
• Further Acquitistions will strengthen the copany if they can move production to the lower cost asian regions
• Increased Sales in the US and Europe should help the company expand rapidly.
• An Increased product base may allow the company to offer extra service to their major customers.
• There is a continued look at keeping costs down (can be seen by moving production to asia). TManagement has also stated they intend to keep costs low and improve margins where possible.
• They have a new head technicican who is attributed with many patents (12 I think) and he will add a significant boost to producing / developing new products which the customer will find more efficient or useful.
• They are focusing hard on securing long term contracts with exsiting and new customers.

Profitability

Profitability looks at the area on how much money (profit) is the company generating relative to the money which is invested into it. This is a key area as we need to invest in companies that make money and produce a return for their shareholders.

Return on Equity is an industry standard to determine how well a company is performing and how well it is in creating wealth for its shareholders. The ROE for ASU has been imporving. The past 2 years has shown ROE figures of 50% or higher . This shows the company is doing a good job of managing their capital. Prior to that they were losing money each year with ROE being negative. Having 2 years of good equity growth shows the company may have turned the corner and are starting to generate value for their shareholders.

There are 3 ways a company can boost its ROE figures and this needs to be investigated before the figures can be regarded as authenticate returns. The ways a company can boost their ROE figures are net margins, asset turnover and financial leverage.

Net margins for ASU are excellent, and while it has some debt shown by debt to equity ratio of 13% I think the companies management are on the correct path as they are quickly reducing the debt. They have used the debt to buy solid assets which are generating good earnings for the company. To see whether the debt has helped the shareholders gain money, You need to look at whether or not the ROE is higher than the ROC which is is in this case for the last 2 years.
Free Cash Flow is another measure which can give some indications into how a business is prospering. Free Cash flow is very important as this is the excess money generated by the business which is available for shareholders ( or available for the company to reinvest and expand the business ). My preference is usually for the company to give dividends as I can probably better invest the money elsewhere. This company has taken the opposite approach and are investing the cash to produce better earnings. So far it is working. Free Cashflow is determined by taking the cashflow and removing the capital expenditure.

2005 Free Cash Flow = Cashflow – Capex = 0.3 - 0 = 0.3

This shows the company has a good cashflow position. Cashflow over the last few years has been scattered but I do expect it to grow as the sales and net profit grows. Deteriming if this is enough free cashflow can be tricky as a guide we should aim for 5% of the sales revenue. Free Cashflow as per Revenue = 0.3 / 12 = 2.5% which is below our target of 5%. In this case we should make an exception as the company is not generating great numbers and are still in the building stage. We are looking longer term and should expect the company to move towards the 5% mark in the next couple of years.

We can also look at the net profit for the last few years. This shows the company ha just started producing a profit the last couple of years. This fits in with our turnaround theory and we should see the company profits continue to grow rapidly in the next couple of years.

Financial Health

Financial health looks at the current snapshot of the company and how well a foundation it has created itself. A company needs a strong financial health to ensure it does not run into extra costs and other financial burdens which could arise in the future.

The first figure to examine is the debt to equity. In this case it is 13.2%. This is a good figure showing that the company ios not overburdened by debt. It also shows the company is williong to take on some debt to improve shareholder value.

The second figure is times interest earned which is how many times the company could pay the interest on its debt. The figure for the company is 15 which is a good figure considering the ASX average is 5 and the sector average is 7. This means they make enough money to cover their interest payments 15 times. This is a high figure due to the low debt and shows the company has lots of borrowing power and will be able to take advantage of opportunities if and when they occur.

The current ratio is how quickly a company could sell off assets to pay off debt. A general rule is 1.5 and this companuy currently has a current ratio of 2.80. This is good as it is higher than our benchmark. The quick ratio is very similar to above except it is a bit more meaningful as it removes inventories which may be sold at a price lower than they are worth. A ratio above 1.0 is a good figure and ASU is showing 2.01. This shows the company is in a good position and should not have any bankruptcy problems in the near to medium term. This is important for such a high specilation share.

A last test is to ensure the company has more Assets than it does liabilities. In this case according to the half yearly report it has 6.8 million in total assets and 2.3 million in total liabilities. This means if something drastic happened all debts could be paid and 4.5 million is available for shareholders. This assumes that all inventories are sold at the value priced for the balanhce sheet.

Risks

There are numerous risks to this company including :
Cosumer spending will be down due to higher petrol prices and interest rate increases around the world.

There are currency risks as they do not hedge their profits against adverse currency movements. This is not a large problem yet though as they usually reinvest the profits into the business in the US, Asia and Europe.

They are only a small company and do not have a great market share as of yet. Competitiors could steal contracts from them and this could severly effect their profits.
They are rapidly expanding and this will involve costs which are one off. At the moment the company seems to be able to handle these costs adquately and they are making profitable decisions on acquisitions.

They have a limited product line which could hurt if their product becomes obsolete.
They have a research and development arm but there is no definite assurances that products developed by the R&D Team will turn into profits as the customer may not need or want the new products.

Management

Management is one of the most important aspects to look at when deciding whether or not to buy a company. It is management that makes all of the important decisions which could make or break the investment. If we intend to buy the company it will be them making the major decisions for us.

Firstly the renumeration policy should be checked. While I think all directors are overpaid, it is worthwhile checking they are not excessively overpaid. The total cost of all directors is close to 1 million. The renumeration is broken into 2 parts, fixed salary, and performance incentives. This at least puts some of the 1 million at risk and gives management a carrot to aim for. Overall 1 million is a very excessive considering the Net profit was only 1.7 million. This is slightly more than 58% of the overall profit. It should be under 10% of net profit. In this case we can make adjustment for these risks. The share is a speculator.

I do like managements continued stance that the company is undervalued. They have backed this up by buying the shares on market. Directors buying shares are always a good indication that the company is financially stable and is likely to be improving their profit in the future. Directors are buying this company every few months and are acquiring a large position.
Management sees good oippoturnites ahead and I beleive they have made a number of key decisions which are benefiting the company. The recent 70% stake in the Italian company for example was a profitable decision. Moving production to Asia is a tough but financially good decision. If they continue to make these decisions then the company should continue to grow.

Overall I like the direction management is taking the company. They seem to be open about issues within the company and the direction they intend to take by expanding their product line and moving into differnt parts of the world.

Target Price and Sell Targets

The target buy and sell points will be different depending on different peoples analysis of the company. I do not subscribe to the Discounted value system and instead prefer some easier figures to tell me whether or not the company is at a good value.

Firstly I like a high dividend. Usually I would aim for 5% fully franked but there are always exceptions to the rule. This company does not pay a dividend. There is an expectation they will pay a dividend in the future.

Secondly I like to see a PE ratio which is not too high. This differs between sectors. ASU is at 5.88 while the market sits at 14.72 and sector at 8.22. This shows that ASU has a low PE ratio compared to the average. I like PE ratios which are low as they provide a quick indication that the company is earning good money relative to their value. Something to be careful of though is that there might be a low PE because the price has dorpped based on thoughts that the future earnings might be smaller. There are no estimates for this companys earnings in the future but if we look at the direction the company is taking and compare that to the earnings from the last few years it is likely that ASU will increase earnings in the near future. Assuming it can improve earnings to 0.4c per share and the PE stays the same the share should move to 2.3c. If we assume earnings are going to remain steady(0.3c) and the company comes back to the sector average we should see it rise to 2.4c.

Technically I can see the share moving back to resistance around 2.6c. It would need to break this level before it could start a any uptrend.

Based on the price estimates of 2.4c and 2.3c We would look for a buffer where we see value. Usually a 20% buffer is a good start and in this case I think we need to increase it to 40% due to the speculatory nature of the share price. Using a 40% buffer puts the buy for each of the estimates at around 1.40c and 1.38c. This is an acceptable price based on the value of the company.

Sell targets would be analaysed as the share releases new reports but initially we should stick to our lower estimated value of 2.3c At this price the share would be fully valued and any gain from there would be minimal. At this stage it is slighly overpriced but an oppotunity might arise to buy the company.

Overall

The company looks to be undervalued. Managment appears to know what they are doing and if they continue the good work the company could grow dramtically. There is ample growth for instutional support and they are in a strong financial position. I believe this company is a good purchase anywhere up to 1.4c although being a speculator you could buy up to 2c as the share price is fully valued at 2.4c (20% gain).

Good Luck