Memstar Technology : Not That An Investment Proposition?

This write up was prompted by the following comment

nicholas said...

Hi there,

Was wondering what do u think about MEMSTAR? Thanks. Hope to hear from you soon :)

October 22, 2010 9:45 AM

Some facts about Memstar Technology from various sources

Company Overview

The Company was incorporated on 12 June 1979 as Form Pte Ltd. On 14 August 1997, it was converted to a public limited company, at which time the name of the Company was changed to Form Hldgs Ltd. It then changed to MediaStream Limited in May 2000. The Company changed its name from MediaStream Limited to Memstar Technology Ltd on 12 September 2007 upon the completion of the acquisition of Memstar Pte Ltd.

The Memstar Group is primarily involved in the manufacture and distribution of Polyvinylidene fluoride hollow fibre membranes and membrane products. The membrane products are used in both industrial and domestic/commercial applications. The membrane products for domestic/commercial applications refer to the membrane water purifiers or integrated water purifiers that are designed mainly for households, but which are also suitable for commercial use by, inter alia, commercial buildings, small businesses, hotels, schools and hospitals. The membrane products for industrial applications are the pressurised membrane modules and submerged membrane modules that are used in water/wastewater treatment, wastewater reclamation, seawater desalination and for other separation processes. As part of its sale of membrane products for industrial applications, the Memstar Group also provides value-added consultancy services to its customers in respect of the integration and maintenance of its membrane products, such as advising on failure analysis, advising on the cleaning of the membrane products, analysis of used membrane products and provision of cleaning agents.

The Memstar Group’s R&D centre and regional marketing centre in respect of countries other than China are located in Singapore. Its marketing centres in respect of the China market as well as the manufacturing and distribution centres, are located in Guangzhou and Mianyang.

Financial Performance

As you can see from my awfully colored graph, ROE, the most important measure of how a company works shareholders’ money has been woe. I do not have the time to investigate, but its ROE is less than 10%! A quick check across to Hyflux showed that the bigger Singapore company had 10-20% ROE.

Valuation And Other Metrics

From Shares Investment, I found that it is 44.6 times trailing twelve months Price-to-Earnings, high compared to the peers it is benchmarked. However, in terms of Price-to-book, which is 3 times, it is average. It is not so popular in terms of how many people are following the stock.

Price Action

As you can see from the price chart, which only shows Memstar’s price from a 10-to-1 consolidation on, it had brought its original shareholders plenty of misery. Memstar has had its time under the sun during the later staged of the previous bull run. Interest in S-Chips reached fever pitch then.

It has since come down to 30% from its 52-week high to rest at $0.08. If the chart is correct trading volume on this counter has been very thing, though short term interest has picked up.

Conclusion

My conclusion is that Memstar Technology is not an attractive buy. While it has announced contract wins over the past three months, these are not significant enough to bump up its earnings, given its historically low margins and ROE.

Low margins also suggest that the industry it is in, is very competitive. It might not be able to bid for more efficient scale projects given its diminutive stature. Furthermore, low ROE suggests that the company is not putting its cash hoard to effective use.

It is also priced at the top end with both PE and PB at levels that most long term investors tend to avoid. However, base on price action alone, it is possible that the stock move to the $0.10 mark, solely on money returning to the stock markets. This represents a possible upside of 25% but with high volatility due to it being a penny stock.