Does mDR warrant a second look ahead of expansion into new businesses?

Does mDR warrant a second look ahead of expansion into new businesses?

Stanislaus Jude Chan
24/04/18, 12:19 pm

SINGAPORE (Apr 24): NRA Capital says mobile phones distributor mDR could soon be more exciting, as it buys into future growth with a change in business direction.

At an extraordinary general meeting (EGM) this Friday, Apr 27, will seek shareholders’ approval to conduct a rights-cum-warrants issue to raise funds ahead of its planned expansion into new businesses in property and investment.

For the FY17 ended December, the mobile handset and accessories distributor, retailer and aftermarket services provider saw its gross profit fall 2% to $27.3 million in FY17, even as revenue rose 4% to $275.0 million.

FY17 earnings grew 40% to $4.1 million, from $2.9 million a year ago. This was mainly attributable to a surge in other income, which trebled to $2.4 million on the back of interest earned from a loan extended to a third party.

“In May 2017, mDR appointed its executive chairman Edward Lee Ewe Ming to the board and thereafter started a new Investment segment that added $1.5 million of income,” says NRA analyst Liu Jinshu in an unrated report on Tuesday.

According to Liu, mDR’s current businesses have opportunities, but face strong headwinds amid a telecommunication industry in Singapore that is highly competitive and mature, with very high smartphone penetration.

“The rights-cum-warrants issue will allow mDR to make scale up the new businesses and generate higher return,” Liu adds. “In turn, the warrants allow shareholders to increase future participation at a fixed cost, thereby enhancing return from future growth.”

“The proposed new businesses in investments and property will in turn expose the group to a wider set of opportunities to raise profitability,” the analyst says.

However, Liu warns that the proposed investment mandate is extensive, and could expose mDR to more risks.

To mitigate these risks, mDR says it plans to impose higher board oversight in investment decisions after approval has been obtained at the EGM.

“As the warrants will mature over six, 18 and 36 months from their dates of issue, we expect the management to accelerate business momentum and introduce more new developments over these timeframes and enhance value,” says Liu.

“In turn, participating investors will benefit from potentially higher value creation and low entry prices,” he adds.

Notwithstanding the rights issue, Liu opines that mDR appears undervalued.

mDR, which has a market capitalisation of around $37.6 million, currently trades at a price-to-earnings (P/E) ratio of 9.16 times and a price-to-book (P/B) ratio of 0.57 times, according to Liu.

Meanwhile, he says mDR’s closest SGX-listed peer, TeleChoice International, currently has a market capitalisation of $120.4 million and trades at 14.7 times P/E and 1.6 times P/B.

Liu estimates that mDR has a fair value per share of between 0.366 cent and 0.582 cents.

As at 12.14pm, shares of mDR are trading 0.1 cent up, or 33.3% higher, at 0.4 cent.

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