Acesian Partners (SGX:5FW) – Undervalued at EV/Earnings Ratio = 1

• Total revenue was $38.17 million, an increase of 157% year-over-year.
• Earnings per share 1.6cts, up 321% year over year from 0.38cts.
• Cash holdings at $18.5m, against a market cap of $25.6m.
• Enterprise Value of $7.99m, Acesian Partners is trading close to EV/E x 1
• Company is looking for ways to diversify and invest their cash hoard.

Company Overview

Acesian Partners Limited, formerly known as Linair Technologies Limited, was established in Singapore in 1998. As a versatile organization, Acesian operates as a comprehensive provider of environmental solutions and integrated services across various industries. These industries encompass semiconductor, healthcare, electric vehicle battery, wastewater treatment, chemical, pharmaceutical, and biotechnological sectors. The Company achieved a successful listing on the SGX Sesdaq (now known as Catalist) in February 2005, further solidifying its presence and recognition in the market.

Critical Airflow Design and Supply

The Critical Airflow Design and Supply segment is their main business.

Acesian Partners is a leading player in the duct manufacturing industry. They achieved this by partnering with experienced global experts. Their ductworks are made of top-quality stainless steel and come in two options: uncoated welded stainless steel or Ethylene Tetrafluoroethylene (ETFE) coated stainless steel. The ETFE coated ductworks have received FM 4922 approval, which means they can safely remove fumes and smoke without the need for internal fire protection sprinklers. These ductworks are highly resistant to corrosion and can handle both dangerous and non-dangerous fumes in exhaust systems.

In addition to the ductworks, Acesian provide specialized solutions for critical environments like healthcare facilities, laboratories, clean rooms, and universities. Their systems use real-time measurement and control to ensure accurate airflow management. With the ETFE coating, the systems save energy and can handle even highly flammable or corrosive fumes in exhaust systems, creating a safe work environment.

Full Year 2022 Results

Acesian reported an excellent FY22 result which saw them earning Earnings Per Share (EPS) of $0.16, compared to $0.038 in FY21.

Highlights from FY22;

• Revenue increased 157% yoy due to huge sales orders for the supply of coated ducts and fittings.
• EPS increased 321% year over year from 0.38cts.
• Net profit margins improved from 12.67% to 20.59%

I do think it is important to remember that things could change (quickly) and management’s current guidance is still somewhat conservative. I say this because times may get tough for Acesian, and other small cyclical companies, as the economy continues to deal with several significant headwinds (global political tensions, high inflation, rising rate environment, etc.). However, any way you look at it, there was a lot to like about the FY 2022 results. But, let’s not forget about what really matters at this stage of the business cycle, cash flow metrics and how the company is positioned, financially.

Cash Is King

• Operating cashflow came in at $10.5mil, free cash flow at ard $10.2mil. This is significantly higher comparing to previous year.
• Huge net increase in their cash and cash equivalent from $8.9mil to $18.5mil.
• Company has no long term debt

Mo Money Mo Problems

Aside from this, Acesian seems to have a good problem, but a problem nonetheless.

Acesian has too much money and is looking for ideas to invest and generate more returns. A large portion of their cash is sitting in fixed deposits earning interest.

Management has plans to use this to invest in securities to generate higher returns. Referring to the minutes of their recent 2022 AGM where management stated their intention to diversify their business to include investments into goverment securities and others.

In my opinion, diversification probably not the best way to do it as this shows that they are unable to invest in their operations to scale to earn higher revenue/profits.

I prefer share buybacks (only if management expects business to sustain and do even better and current share price is undervalued). They could also maybe issue a special dividend.

Valuation

Acesian is attractively valued based on its P/E ratio of 3.42.

Based on data from SGX, they have an enterprise value (EV) of $7.99m. Enterprise Value is a alternative valuation of a company which includes the long term debt and cash portion of the company. Acesian has no long term debt and a huge cash pile, this makes their valuation even more attractive. EV/Earnings ratio comes in at 1.01

Risks

With such a low valuation, it could be probable that the market thinks Acesian is a one-trick pony and does not expect it to sustain its level of earnings. Again referring to their AGM minutes, management seemed conservative and did not give a forecast and an update of their order book.

The risk here is that Acesian could report lower earnings in FY23 and this will affect its valuation.

But let’s look at the bright side. Whatever happens, 2/3 of Acesian’s market is still made up of cash.

Conclusion

FY22 results were exceptional, with the company reporting impressive growth in revenue, margins and net profits. Valuation is very attrative for this company and they have very stable balance sheet. However, with the company not updating on its business outlook and order book, there is a lack of visibility for the company’s growth. This pose as a risk to the share price and valuation.

Cheers.