MDR a gem among the penny stocks

Published March 21, 2012


By VEN SREENIVASAN


THE unfolding market recovery has stirred up significant interest in penny stocks, mainly because of their potential to deliver higher percentage returns.


The danger is that, in their chase for quick profits, punters often overlook the fundamentals. Many of these companies have fragile balance sheets and vulnerable businesses.

That said, there are some potential gems out there.

One which has caught the market's fancy lately is mobile telephony services player, MDR (short for Mobile Doctor).

MDR rose from the ashes of Accord Customer Care Solutions or ACCS, which became embroiled in a major accounting scandal that ultimately led to the prosecution of key company officials. That was more than six years ago.

What a difference those years have made.

Following a massive restructuring, the company's fortunes have been revived under the chairmanship of former Cycle & Carriage (C&C) managing director Philip Eng.

Mr Eng took over the stewardship of the company in late-2005 at the height of the ACCS crisis, and was joined by a capable management team led by CEO Ong Ghim Choon and chief financial officer Doris Wee in 2009. Together, they have rebuilt the business, strengthened its balance sheet and nursed it back to profitability.

Last month, MDR unveiled its ninth consecutive quarter of profits. The latest set of results boosted its full-year earnings to $7.6 million from $3.8 million in FY2010. MDR also declared its maiden dividend payout of $2.1 million, which works out to 0.033 cents a share.

Perhaps not surprisingly, the shares of the company have doubled in value this year, while its in-the-money warrants, which expire in September 2014, have quadrupled in price.

But the company's upward trajectory seems to have convinced some seasoned corporate players.

Keppel Land CEO Kevin Wong has steadily accumulated almost one billion shares, giving him a 15 per cent stake in the company. Mr Eng himself last week converted some 2.4 million share options and 45 million warrants.

By any account, MDR has chalked up a remarkable comeback for a company that was written off and left for dead in 2005.

A lot of the credit should go to Mr Eng.

Instead of continuing to focus only on after-market services, he broadened MDR's footprint into franchised distribution and retail services. Today, it is a platinum retailer for M1 and SingTel.

Last month, after unveiling the company's full-year results, Mr Eng declared that MDR would boost its business footprint and bottomline through acquisitions of more earnings-accretive businesses. He appears to be counting on its strong balance sheet and conversions of its in-the-money warrants to finance acquisitions.

Indeed, MDR has to look beyond a business which yields a paltry 2.5 per cent margin. It needs to acquire a business which can deliver a quantum leap to its topline and margins.

Fortunately, the company appears to have the financial wherewithal to do this.

Last year, it repaid all $55 million owed to its bankers and retired some $12 million of loan-stock overhang. It is now sitting on almost $16 million in cash and has no debt.

If anyone can execute an ambitious business re-engineering plan, it has to be Mr Eng.

After all, as MD of C&C in 2000, he engineered the purchase of a 31 per cent stake in Indonesia's Astra International for a princely sum of US$296 million. By 2005, Astra had become C&C's subsidiary after the Singapore company raised its stake to 50.5 per cent. Today, its Astra stake is worth about S$20.8 billion, and the Indonesian business contributes to 90 per cent of the restructured Jardine C&C's earnings and accounts for 95 per cent of its market value.

Mr Eng is not content overseeing a smallish telecommunications equipment player delivering thin margins. If he clinches an earnings-acquisitive business, it could double the company's topline from $360 million now. In such cases, economies of scale can deliver a four-fold boost to the bottomline.

Given how he helped boost the value of C&C's stake in Astra 27-fold, this is not beyond Mr Eng's capabilities.

There are about 30 so-called 'micro-penny' stocks floating around on the Singapore Exchange. But market insiders who follow the company say few can boast its growth trajectory and potential. They note that at 7.5 times earnings, it is trading at around half the market's valuation.

If anything, the recent surge in interest in this stock seems to be based on the reckoning that a slight earnings boost will translate into a 'multi-bagger' gain.

On paper at least, the odds seem good. - BT