Mikro Msc Berhad
Malaysia’s Home-grown Electrical Equipment Distributor that broke the Stranglehold of larger Global Players
Recently, Value Investing College Malaysia community analysed Mikro MSC Berhad (MIKROMB) during our monthly company discussion session together with our enthusiastic graduates. MIKROMB design and manufacture electrical distribution equipment, such as overcurrent relays, earth fault relays, earth leakage relays, power factor regulator, protective relay and digital meter etc.
MIKROMB products are used as an important component of a building's integrated electrical system. They are designed to monitor and prevent damage to electrical equipment by isolating and tripping a circuit breaker when an electrical fault is detected, in the process allowing unaffected parts of the electrical system to continue to operate. The versatility of their products makes them ideal for use in schools, hospitals, hotels, shopping complexes, banks and industrial plants and other mid-sized to large buildings.
The history of MIKROMB begins with a classic underdog story involving three visionary people coming together, who - with perseverance, brains and a little luck - created a company to design and sell electrical distribution equipment. This pitted them against some of the world's biggest corporations who already had long established presences in Malaysia and the wider Asian region.
We found 3 key points that made MIKROMB a company worth studying.
1. Experienced Management Team that Preservers
Mikro MSC was established in the midst of the Asian Financial Crisis in 1997, founded by Yim Yuen Wah, Wong Yin Wah and Fong See Ni who had been working in the electrical industry for many years. They knew that nearly all electrical distribution equipment available in Malaysia was imported from overseas, often by major international players (such as Schneider, Siemens and ABB), and sold at a premium. A plan was set in motion to create a company that could offer high quality, locally built, internationally-accredited electrical distribution products, at competitive prices.
The use of electrical distribution equipment was widespread in Malaysia at that time. It was used in all types of buildings, from schools, hospitals and hotels to shopping complexes, banks and industrial plants. Usage was boosted even further in 1994 when the Government passed a law that made their installation compulsory. And it was this upsurge in the demand for electrical distribution equipment, and the fact that large multinationals had a stranglehold on manufacturing and supply, that led the entrepreneurial founders to bring the company into existence.
For the first few years the founders struggled to persuade the market that locally produced products could match foreign competitors in quality, but with perseverance and by always looking for regulatory recognition, MIKROMB started to develop a reputation for reliability and excellent value. During the company's first seven years of existence, the operational focus was placed on creating a large portfolio of products. This was achieved through significant time and monitory efforts being placed on R&D projects, while outsourcing the manufacturing activities to third-party companies. The effect this had was to surprise industry-watchers; here was a relatively small company that could offer a similarly diverse array of products as multinational competitors were offering.
After nearly 20 years of R&D as well as trial and error, the management have built a strong in-house R&D team that enables MIKROMB products to match major international brands’ in quality but with competitive pricing.
This ultimately resulted in MIKROMB dominating 50% of the local market share in electrical equipment distribution.
2. Expansion Plans and Growth Drivers
According to Mr Yim, MIKROMB products usually have a long life cycle of about 8 to 10 years and are typically installed in high-rise buildings and infrastructures such as MRT stations. As such, the demand for their products is somewhat correlated to construction activities. For Malaysia, the strong growth in domestic sales in recent years is due to the investment in properties and infrastructure in the prior years. While domestic demand should sustain for another two years.
MIKROMB is currently growing their export sales to other Asian countries. Their largest export market - Vietnam, have been helped by booming construction activities and aggressive infrastructure development by the Vietnamese government. Despite dominating a 50% domestic market share, MIKROMB has been intensifying its efforts to expand overseas markets to about 30 countries (key markets are Vietnam, India, Indonesia, Iran and Bangladesh etc.) to date.
While Malaysia currently contributes about 55% of its revenue, and the remaining 45% from overseas, Mr Yim hopes that in FY19, this ratio will be reversed.
As part of its expansion plans, the company, which currently employs about 85 staff, has acquired a piece of freehold industrial land measuring about 4,047 square meters, with a single-storey warehouse, an annexed three-storey office block for RM11.72mil in Kota Kemuning, Shah Alam. After completing some renovation work by end of this year, MIKROMB would see its production capacity increase by 5 times to meet expected sales demand. In line with the acquisition, the group has completed a private placement which raised about RM8.46mil for renovation work, purchase of machineries and equipment, and working capital.
After about four years of research and development (R&D) and millions invested, MIKROMB has launched its Internet of things (IoT) solution or a connected system feature that allows monitoring and communication between machines, providing information and data that would be useful for early detection of abnormalities or possible malfunctions. This is expected to be a fresh earnings growth driver for MIKROMB. The company will see a positive impact on its bottom line by the financial year ending June 30, 2019 (FY19), according to the group’s managing director, Mr Yim Yuen Wah.
During MIKROMB 20th anniversary dinner, Mr Yim stated that the launch of IoT solutions is something that they are looking forward to as it helps their customers better manage their projects. He also pointed that the group has consistently allocate about 3% to 4% of its revenue to R&D and will continue to do so moving forward. In FY17, the group invested about RM1.82 million in development, which was about 3.6% of MIKROMB’s revenue of RM50.4 million.
3. Track Record of Quality Excellence
The management previously mentioned that it is not easy to convince even local companies to accept their products as they do not have the reputation. When their company first started, they had to contract 3rd party manufacturers to manufacture their products whilst they focus on product development. That effort has proven fruitful as they have managed to convince large developers to use their products in their mega structures. MIKROMB’s products are used to monitor and prevent damage to electrical equipment, thereby mitigating breakdowns or interruptions to business operations, widely used in all types of buildings, from shopping malls, hotels and airports to schools, hospitals and industrial plants. Some notable projects include KLCC, KLIA2, KL Eco City, MRT stations in Singapore, Resort World Sentosa, Doha International Airport, Ho Chi Minh Hospital, F1 Circuit Bahrain etc.
Infrastructure protection is extremely important and strictly inspected to ensure safety of all patrons. Therefore, for these large projects to use MIKROMB’s products implies that their product quality is proven. Apart from that, MIKROMB also provides a 2 year warranty and after purchase support for their products which further enhance their credibility.
The quality excellence of MIKROMB’s product is also strongly evident in the company consistent profit generation and sustainable margins. The reason why MIKROMB’s products command very high profit margin is because they sell their products at a significant discount compared to large multinational brands.
However, according to their gross profit margin, these products are still highly profitable!
A 50% gross profit margin means that if they sell a product for RM 100, it only takes RM 50 for them to make the item. Means they get to sell their products at double the cost to make it! And that is after they sell at a significantly lower price than multinational brands.
Mikro MSC Berhad long term prospects looks promising, driven by its product resilience and innovation, hands-on management, strong in-house R&D and expanding geographical footprints. Furthermore, has dominated the local electrical equipment distribution market with good financial position and its experienced management is ready to further grow the business to greater heights. However, in FY18 as its 9MFY18’s earnings slid 33% to RM5.5 million, mainly due to temporary product mix/sales aberration, forex losses, higher promotional expenses and expiry of the pioneer status. Business risks such as science and technology risk cannot be understated as MIKROMB’s in a fast moving industry that requires constant investment in R&D to remain competitive and relevant especially its new venture into IoT solution.
Disclaimer: All facts and opinions presented are for educational purposes only. This is not a recommendation to buy or to sell. The author involved in the writing of this message has no vested interest in the companies. Please consult a professional for expert financial or other assistance or legal advice.