January 1997 Newsletter
MARKET COMMENT
Featured Stock: ELECTROCON INTERNATIONAL
FUNDAMENTAL ANALYSIS
OTHER SUPER CHEAP OPPORTUNITIES FOR 1997
PHONE SERVICE
We anticipate that second and third tier stocks will advance sharply during the first quarter of 1997. The group has been out-of-favor since midsummer due to negatives in the market place, in addition, strong tax selling pressure has caused prices of many to trade at very attractive multiples. We also believe that the Dow stocks, S & P and NASDAQ 100 will correct during January as money managers lock in extremes.
We foresee slower growth, which, of course, bodes well for the mid to micro caps.
Government in check, inflation muted and interest rates to head lower, which indicates that stock prices are headed higher with extremes in volatility.
We suggest selling high multiple stocks, especially DOW related, and concentrate on undervalued NASDAQ NMS, NASDAQ small caps and, of course, NASDAQ BB.
Happy skiing, Wm. Velmer
Featured Stock
ELECTROCON INTERNATIONAL
(NASDAQ Small Cap EPLTF
- First recommended EPLTF on 8-30-95 at $.95 (reached $4.25).
- Featured as stock pick of 1996 in Dick Davis Digest @ $2.41 (reached $3.50)
- Second recommendation of EPLTF on or about December 18, 1995 @ $2.375.
- Top Stock Pick for 1997 in Dick Davis Digest to be released soon @ $1.18 (more attractive than when we first featured EPLTF during 8-95).
- SUPERFAST PHONE SERVICE NOTIFIED ON DEC 21 CONCERNING EPLTF.
CHIPS, CHINA, & SUPER CHEAP
The company is a diversified Hong Kong based holding company that conducts operations through its subsidiaries in two separate business segments - the distribution of semiconductor products (primarily computer chips) to small and medium sized manufacturers located in Hong Kong and China and the distribution of golf carts, irrigation products and systems, fertilizer and turf equipment to golf establishments in Hong Kong, Macau and China.
At present roughly 90% of EPLTF’s revenues are derived from the semiconductor business, while 10% from the golfing division.
During 1996 40% of the business was located in China, while the remaining 60% was derived from Hong Kong.
The seasonal cycles in the Company’s business are related to the seasonal cycles in the electronics business. Sales of the company’s chips that are incorporated into toys, clocks and radios, for example, generally increase from April through October, as the manufacturers of these consumer products increase their production in anticipation of the Christmas holiday season. Sales of the Company’s chips used in computers are steady throughout the year.
The Company continues to expand into China rapidly - at present the sales network includes 10 cities and has over 60 sales representatives in China.
First and foremost, it should be fully understood that most semiconductor related companies had an extremely difficult time during 1996 due to the collapse of chip prices due to overcapacity and a slowdown in consumption worldwide. In our opinion, this was a temporary situation and anticipate solid growth (maybe not as robust as we have seen during the past few years) during the next four years.
Upon review of graph B, it is evident that the overall Asia-Pacific semiconductor growth during 1997 will be at least 12%, in addition, the Hong Kong market is currently trading at a PE of around 13 (US market S & P PE value around 18). Upon review of Chart A, one can see that we compared EPLTF to four other semiconductor distributors, namely, MI, PIOS, AVT and ARW and calculated an average PE of 11.6x for 1997 earnings estimates for the four.
Let us now consider EPLTF and calculate a meaningful valuation for its shares based upon the current stats.
From review of Chart 1 one can easily see that 1996 sales will only exceed 1995 by 17% and earnings will be down by 50% (due, of course, to semiconductor over capacity and lower demands) and due to this, the share price reflects the shortfall, and in our opinion, has been dramatically over stated due to tax selling and overblown avoidance of micro-cap investment opportunities. All of this is history. During 1997 revenues are anticipated to reach at least $74 million with earnings/share of at least 20¢ (conservative values being used). This is a 40% sales growth and a 100% earnings appreciation over 1996 estimated results. EPLTF currently trades at $1.125 and sports an estimated PE of only 5.6x. If EPLTF were to trade in line with other distributors, that is, using a PE of 12x, then our share price should approach $2.40. If we were to value EPLTF with respect to the Hong Kong market (13x) and the S & P 500 (18x), then our share valuation would approach $2.60 and $3.60, respectively.
As stated earlier, EPLTF is expected to grow by 40%. If we were to assign a PE of half its growth, then a PE of 20 could be assumed, or a share price of $4.00. Based upon PE valuation, EPLTF has the potential to trade at 100 - 300% above its current share price due to our various PE scenarios.
Another extremely undervalued aspect of EPLTF is its current price to sales ratio that is .10 based upon 1997 est. and .14 based upon 1996 estimated. The distributor group as a whole sports a PSR of around .50. If EPLTF were to trade at a PSR of .50, or even .25, then EPLTF’s share price again would be dramatically higher; that is $4.00 and $5.75, respectively and $2.00 and $2.875.
Again, any way you view it, EPLTF deserves to be at a much higher price level.
At present EPLTF has no long-term debt and as of September 30, 1996 has cash of around $4 million, resulting in 60¢/share in cash and equity/share of around 35¢. Management controls around 50% of the 6.6 million outstanding - additional levels of management being added in order to accommodate future growth.
To reiterate, revenues are anticipated to continue to grow by 40 to 50%/year during the next few years. Management has a very strong business relationship in Asia, which dramatically enhances business opportunities. Personal computer and electronics use in China is expected to grow rapidly, which bodes well for EPLTF.
Bottom Line - We have extremely attractive present and future fundamentals, new cash infusion anticipated, huge untapped market growth potential, seasoned management and an under-owned, under-followed and obviously undervalued situation. We believe that EPLTF has a 100% to 300% upside potential during 1997 - current risk is not participating in China.
We believe that this situation belongs in all diverse emerging growth portfolios that would like some international exposures in the area of the world that promises huge rewards for the patient investor.
EPLTF offers everything: discounted fundamentals, high technology and China at less than fire sale prices!!
We currently monitor 15K shares in our master portfolio, one position in our 900# portfolio and one position in our Global Portfolio.
- Corporate Contact: Chris at 303-292-9419 - FAX 303-292-2183
- Corporate Headquarters: 011-852-248-16022
- Broker contact: Greg Nelson at 1-800-453-9408
Mike Chesler at 1-800-331-1355
Other Super Cheap Opportunities for 1997
- CVDE @ $1.375 trades at 3.4x 1996 earnings estimate
- HIAI @ $.25 trades at 5x 1996 earnings estimate.
- ORBT @ $2.00 trades at 25% below recommended price - super cheap - see last newsletter.
- AEDU @ 15/16 anticipates 8 million in sales and $.15 for 1997.
- ALMI @ $1.395 - our internet play 45% below our recommended price - new products, plenty of cash.
- Shinawatra Computer and Communications (Thailand) at $6.50 looks like a steal - yields a few percent as well.
- George Risk Industries (RISKA) - super cheap at $1.50 should be trading at $3 to $4, but management (President) has not a clue.
- ISOL, WLTK, SEQS, WALB, TNGI, PTIS.
- Not recommended, but we love to speculate: MTCI, SCTI, SAZZ, TELEU, PRIB, TSSW, CHBR.
In order to stay in line with SEC guidelines, S.A. Advisory may buy, hold or sell positions in all securities recommended. The portfolios are all hypothetical in nature. It is likely that all recommendations were purchased prior to the recommendation. We may buy additional shares or may sell shares at any time. S.A. Advisory's portfolios are geared towards sophisticated investors aiming for long-term capital gains. Our trading habits may vary at our own discretion. Most recommendations are based upon strict fundamental analysis. Usually revenue and earnings EST for low priced common stock result from management discussions.
Copyright © 1996 S.A. Advisory
