Rudi's View | Jul 19 2007
This story was first published two days ago in the form of an email sent to registered FNArena readers.
By Rudi Filapek-Vandyck
The technology sector on the Australian share market consists mostly of software sellers and developers a la MYOB (MYO) and Oakton (OKN) and service providers such as Melbourne IT (MLB) and Computershare (CPU). The difference between these companies and the likes of Texas Instruments and JDS Uniphase -also labeled technology companies- is arguably as large as with refrigeration company Hastie (HST) and shipbuilder Austal (ASB).
One of the few genuine exceptions is Arasor International (ARR) which is often referred to as a “high tech” company instead. Arasor only listed on the ASX in October 2006 but the company has already managed to attract the attention from the professional investment community in such a short time.
Arasor, headquartered in California, presents itself as a developer and manufacturer of integrated optical and wireless solutions. Without getting too much into technical detail, the company has developed and patented a high tech chip (semiconductor) which can make things faster and better when used in networks (more bandwidth), wireless communication (faster speed) and consumer electronics (Laser TV is seen as the next big thing for the industry). As these chips reduce the need for additional devices (in wireless broadband networks, for instance) there is also a clear cost advantage for some customers. The company is primarily focused on large growth markets in India and China where wireless broadband is still in its infancy.
When the company sought to raise $30m in March to expand its production capacity following large orders from India and China the demand for its scrip among institutional investors was so high that only a fraction of total subscriptions could be satisfied. The rumour at the time was that one investor had offered to take up the complete share placement, but management gently denied the offer.
The Arasor share price has moved in similarly remarkable manner. After listing at $1.50 in October last year the shares ran up to nearly $4 by April this year. Since then, however, they have gradually depreciated and even sunk below $3 again this month. The share placement in March was priced at $3.05.
Thus far only one stockbroker officially covers the company, Patersons Securities. Patersons was closely involved in Arasor’s stock market listing but analyst Russell Wright is an absolute fan (as is the small cap team at Macquarie Equities).
On Tuesday Wright decided it was time to act: he raised his recommendation to Buy from Speculative Buy, stating it was time “to make the message stronger”. His price target stands at $8.80. In previous research reports he stated he could easily justify a share price valuation of $10 for the shares.
What makes Arasor so special?
I asked the question to company management in March and the response was: “we all have had successful careers at some of the biggest companies in the world, we made all a lot of money, learned all the tricks of the trade and this time we are into the game together to build something beautiful, something successful, something we feel is our own.”
Testament to this statement are the curriculum vitae of members of the board and company directors on the Arasor website mentioning former positions at Nortel Networks, AT&T Bell Laboratories, Yahoo!, Microsoft, Piper Jaffray and Hewlett Packard.
According to one insider who wishes to remain anonymous this “we do our own thing” approach by Arasor management also has its disadvantages as the company seems to have a policy of avoiding too much attention, especially from the media. A fact acknowledged by management in March: “We think it is better to focus on building our company. We’re very anxious not to create too high expectations”. According to the insider management deliberately understates achievements and market potential.
In Russell Wright’s view this could possibly be one of the factors behind the recent share price fall. He is also of the view that investors better ignore last year’s prospectus as the forecasts made in the document will prove too conservative in the years ahead.
Arasor management already proved Wright’s view correct by revising its forecast for 2007 following the large orders from India and China.
On Wright’s projections Arasor should report a net profit of some $12.5m in February next year (the company’s fiscal year runs from January to December). This should grow to $32m in 2008 and to $53m in 2009. Earnings per share should improve from 14.2c this year to 35.7c next year to 59.9c in 2009. If these projections prove correct (Wright is of the opinion the company is likely to do better) Arasor’s outlook is for EPS growth of 151% and 67% respectively over the next two years while 2007 should see the company turning profitable.
Arguably, a company with such a growth profile deserves a higher multiple than just below twenty times projected EPS for the current year.
It is possible that part of the retail investment community has shied away from the stock following the $30m capital raising in March as it showed that for a young and dynamic company such as Arasor high growth often also comes with a need for fresh capital. Market rumour has it that management is currently negotiating a large contract with Japanese electronics giant Sony. A separate rumour that the company will soon announce a large share placement may well be linked to the first one.
No doubt, if these rumours are proven correct, company management will argue the new investments will facilitate even faster growth in the years ahead. Given the interest for the share placement in March the company will likely have little problems in raising the necessary funds to facilitate additional investments.