By ASILA JALIL / Pic TMR
SOFTWARE development firm ARB Bhd’s profit after tax and minority interests (Patami) is expected to decline by about 20% from RM33.2 million in 2019 to RM26.5 million in 2020, according to estimates by Inter-Pacific Research Sdn Bhd.
The research house forecast the decline as it sees ARB being affected by business disruptions arising from Malaysia’s Movement Control Order (MCO) due to the Covid-19 outbreak, as well as potentially weaker consumer spending.
“However, we expect the group’s Patami to recover in the financial year ending Dec 31, 2021 (FY21), to RM33.3 million, tracing the rebound in economic activities as the pandemic concerns should ease which should also see a recovery in consumer spending,” it wrote in a recent note.
Potential pitfalls to its earnings estimate are increased competition in business strategy, obsolescence of current technology, inventory risk and cost of holding inventory, and loss of key business partners.
In FY19, ARB’s net profit jumped sevenfold to RM34.77 million from RM4.23 million a year earlier, driven by its IT business.
According to its Bursa Malaysia filings, the group’s revenue is mainly contributed by two subsidiaries which resell customised enterprise resource planning (ERP) software systems; and Internet of Things (IoT), Internet and multimedia development and consultancy services.
Inter-Pacific’s ‘Buy’ recommendation for the company is premised on its steep 65% share price decline from the peak of 45 sen in August 2019, which is “already overdone and see value to have emerged as a result”.
Shares of ARB sank 2% or 0.5 sen to close at 24 sen yesterday, giving the group a market capitalisation of RM70.51 million.
In time, the group’s valuations may improve after it establishes a proven track record of generating positive cashflow from its operations.
“For now, we anticipate the management will need to conserve cash to accommodate its growth strategy and hence, we do not anticipate the company to pay any dividends over the next three financial years,” Inter-Pacific said.
It noted the company’s multifold growth is underpinned mainly by holding equity stakes with experienced management in various business models in exchange for ERP systems for effective inventory decision and real-time data.
ARB, formerly known as Aturmaju Resources Bhd, collaborates with small and medium enterprises (SMEs) that lack some technology skills in the distribution and service industries to adopt and recognise the benefits of ERP systems.
These systems will help resolve back-end operations and allow companies to focus on sales and effective inventory management.
“For the most parts, these SMEs do not have the necessary funding or risk appetite to invest in a multi-million IT software, but ARB’s offer to partake in their inventory holding and supply of ERP systems is an added benefit to its clients, freeing up some cashflow requirements,” the research firm added.
The group’s joint-venture (JV) business model, where it holds a 51% stake in each JV, will also help to boost its income statement and balance sheet size.
For the time being, the company is not expected to recognise significant revenue from its IoT segment in FY20 and FY21 as all its projects are in the planning and redesign stages.
The group will continue to penetrate the IoT segment through JVs with suitable strategic partners to speed up the business growth by utilising its strength in technical expertise, Inter-Pacific said.