Case Study of Elsoft Research Berhad (0090)

By Stella Goh – Market Data Analyst | 30 October 2019


Elsoft Research Berhad is an established technology company founded in 1996, which primarily involved in research, design, development and manufacturing of automated test equipment (ATE) and burn-in systems in Malaysia. The company’s name derived from two words, namely electronics and software which symbolises its core competency in electronic design and software innovation.

ELSOFT was listed in ACE Market on 2 August 2005 and successfully transformed into Main Market on 22 January 2015 in Bursa Malaysia. There is three primary markets that ELSOFT is targeting which is Automotive, Smart Devices and General Lighting Industries. Elsoft has four main subsidiaries known as Siangtronics Technology Sdn Bhd (STSB), Elsoft Systems Sdn Bhd (ESSB), Leso Corp Sdn Bhd (LESO) and Butterfly House Sdn Bhd (BHSB).

Business Model

As a leading provider of Lighting Emitting Diodes (LED) test and burn-in system, ELSOFT mainly provides cost-effective automated test equipment (ATE) solutions to the semiconductors, optoelectronics and automation industries. They have developed motion controllers, own standard industrial IO Boards, LED Tester, Automated LED Test Equipment, LED Burn-In System and Solar Cell Tester which will be used by its customers to test optoelectronics devices such as Lighting Emitting Diodes (LEDs), imaging sensor, automotive lighting and so on before the products have launched into the market.

Financial Review

Based on the past 5 financial years of revenue chart above, ELSOFT’s revenue grew year-on-year (y-o-y) from FY2014 (+79.01%), FY2015 (+10.19%), FY2016 (+27.89%), FY2017 (+1.16%) to FY2018 (+21.45%). On a CAGR basis, the revenue has grown 25.38% based on 5 years. The Research and Development (R&D) efforts made by ELSOFT in FY2017 was the key success factor to drive up the company’s revenue as the demand of R&D activities from smart device industry increases as well as most of the cars nowadays are switching to LED lights in FY2018.

Elsoft Research Berhad has successfully achieved a tremendous high record of gross profit by 30.45% from RM35.2 million in FY2017 to RM46 million in FY2018. Based on the past 5 years of CAGR basis, the gross profit has grown 30.93%. The growth of gross profit was driven by higher demand for latest technology of Automated Test Equipment (ATE) such as infrared, laser devices, automotive headlamp and next generation of LED flash in FY2018.

The Profit After Tax (PAT) was grown from RM29.8 million in FY2017 to RM39.8 million equivalents to 33.29% in FY2018. On CAGR basis, the Profit After Tax (PAT) grew by 29.73% was in line with the growth of revenue and gross profit of the company which is also mainly attributable to R&D activities from smart devices industry.

Based on past 5 financial years of dividend chart above, the dividend paid by ELSOFT has increased years on years from RM7.2 million in FY2014 to RM30.4 million in FY2018. The company has declared 4 tax-exempted interim dividends in respect of FY2018 amounting to RM0.0459 per ordinary share based on the enlarged share capital after the issuance of new ordinary share under bonus issue and share split of which representing a dividend payout ratio of 77%. (Source: Annual Report 2018)

ELSOFT has a dividend payout policy of 40% of its net profit, but it has been consistently distributing more than 70% of its profit to their shareholders since FY2016 which is consistent with the growth momentum.

Cash Flow Statement

The net cash from operating activities has increased by 66.7% from RM28.8 million in FY2017 to RM48 million in FY2018. The increased operating cash flow was mainly due to the company was able to receive due to date’s receivables from its clients with an amount of RM10,018,118. The company also have paid back the payables, and contract liabilities amounted to RM994,271 and RM1,154,202.

The net cash used in investing activities have obtained a negative cash flow in FY2018 (-RM21,756,232) was mainly due to the purchase of Property, Plant and Equipment (PPE) and other investments for business expansion amounting to RM670,383 and RM76,284,926. The negative cash flow from investing activities indicates that the firm is investing more in the business.

The net cash used in financing activities have increased from RM21,593,680 in FY2017 to RM28,669,576 in FY2018 was mainly attributable to the purchase of treasury share and dividend payment amounting to RM297,828 and RM30,398,748.

Does the company able to pay back its liabilities? Based on my computation of liquidity ratio, ELSOFT has a lower current ratio of 5.787 times in FY2018 compared to 7.198 times in FY2017. Even though the current ratio has slightly decreased, the company still capable of paying back its liabilities by using current assets such as inventories, current tax assets, other investment, trade & other receivables, cash and bank balances with a total amount of RM92,467,209.

Future Challenges

A 100% owned subsidiary of ELSOFT, known as System Sdn Bhd (ESSB) has successfully obtained the Certification of Standard ISO 9001:2015 Quality Management System valid from 16 August 2018 to 15 August 2021. The achievement of ISO 9001:2015 certification demonstrates that ELSOFT is committed to achieving outstanding performance and providing superior quality products and services which can meet their customer’s expectation. (Source: Annual Report 2018)

According to the publication released by Semiconductor Trade Statistic, the demand for a semiconductor was up 13.7% in FY2018 to US$468.8 billion and expected to be slow down by 13.3% in FY2019 and to be picked up again in FY2020. ELSOFT has experienced weaker demand for ATE in smart devices, automotive and general lighting industries for the beginning of FY2019.

The Research and Development (R&D) activities play an important role in FY2019 for both smart devices and automated industries. The ongoing R&D activities such as ATE for infrared & laser device testing, next-generation for ATE smart device industry / automotive industry will focus more on improvement of existing products and development of new products for new application for customers.

Despite global economic uncertainties, ELSOFT is confident and prepared to take up new opportunities to broaden its customer base and product range due to their solid fundamental and healthy financial stand.

Rating System

Return on Equity (ROE) = Good
Revenue [5 years CAGR] = Good
Net Earnings [5 years CAGR] = Good
Basic Earnings per Share (EPS) [5 years CAGR] = Good

My Insight

Based on my calculation on Discounted Earnings Model, Elsoft Research Berhad has a fair value of RM2.047. The current market value of ELSOFT is RM1.02 which is undervalued. (Based on 23Oct2019). ELSOFT has a beta of 1.003 (500days) indicates that the company is slightly volatile than the current market. Based on my computation of Compound Annual Growth Rate (CAGR), ELSOFT has an expected market return of 6%. ELSOFT has a very strong fundamental as it achieved a very high Return on Equity (ROE) of 35.213% in FY2018 compared to 27.775% in FY2017 indicate that the company is healthy.

In conclusion, Elsoft Research Berhad has achieved outstanding performance in FY2018 as the revenue, gross profit and net profit after tax increasing years by years from FY2011 to FY2018. Given the strong financial position, the Group is firmly committed to continuing its investment in R&D activities to adapt the needs and demands of rapidly changing technology development. Despite global economic uncertainties, ELSOFT is well prepared for the challenges for the year and beyond. I believe the company able to grow very well in the future since the Internet of Things (IoT) and Industry 4.0 will need a lot of high-end equipment to test and automate.


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