The big problem with ARR is that it is not producing a profit yet.
But do you buy Wilkie's explanation?
"The dilemma for Arasor, Wilkie explains, was that the company received a request for a large order from one of its biggest customers and this had not been anticipated when the market was told the second half of 2007 would see the company achieve its first profits.
In essence the dilemma Arasor management faced was either to stick with the previous guidance of achieving profitability in H2 2007, and telling customer Bharat Sangar Niham (BSNL) to come back another time, or to build a larger presence in the Indian wireless telecom market more rapidly and so create a bigger platform for future growth."
The worry, of course, is that the company has to keep coming back to the market for money. Recently they had to raise $12 m @ $2.10. But according to Wilkie that will be the last for sometime.
One thing good thing is that Macquarie and Goldman Sachs seems to be still in there which is a vote of confidence in management, in my opinion.
Comments based on the following article, dated August 31. v v v v
Arasor Share Price Too Low, Says Management FN Arena News - August 31 2007
By Rudi Filapek-Vandyck
Management of high tech company Arasor International (ARR) has been busy answering questions from not-so-pleased institutional shareholders since the company announced late last week it would become profitable in 2008 instead of the previously flagged 2007. But that’s just one side of the story, explains director of operations Australia, Scott Wilkie, during a telephone conversation with FNArena.
Wilkie says some shareholders like the Goldman Sachs fund operating from Hong Kong actually congratulated management with the decisions that have been made so far with regard to the company’s core operations. Goldman Sachs was not surprised, nor disappointed with last week’s shock announcement, but others in Australia did not take the news in the same gentle manner.
The dilemma for Arasor, Wilkie explains, was that the company received a request for a large order from one of its biggest customers and this had not been anticipated when the market was told the second half of 2007 would see the company achieve its first profits.
In essence the dilemma Arasor management faced was either to stick with the previous guidance of achieving profitability in H2 2007, and telling customer Bharat Sangar Niham (BSNL) to come back another time, or to build a larger presence in the Indian wireless telecom market more rapidly and so create a bigger platform for future growth.
It is not difficult to see why Goldman Sachs has been commending management for the choices made. In Australia, however, some more explaining had to be done.
Meanwhile the Arasor share price has fallen to just above $2. This is still substantially higher than the $1.50 the shares listed at in October last year, but also far, far away from the peak at $4 achieved earlier this year. Surely this must make some institutional shareholders cross, especially the ones that signed up to the company’s share placement in March this year at a price of $3.05 per share.
Wilkie says institutional investors are not the only ones who are unhappy with Arasor’s current share price. Management is as well. One of the factors that has dogged the Arasor share price over the past few months, he says, is a persistent market rumour the company would soon announce a large capital raising to fund a significant acquisition. And while Arasor management has tried to dispel the rumour since it became aware of it, the rumour simply refused to go away.
It would appear this has caused some institutional investors to sell on the market in anticipation they could step back in at a lower price later. Arasor has no plans to make any such acquisition, Wilkie reassures firmly.
However, it turned out the company did return to the market for extra funds this week. House stockbroker Patersons allotted new shares priced at $2.10 for the total sum of $12m on Tuesday. The placement was oversubscribed to the tune of some $2m. Given the turbulent state of global share markets, and the anxiety among investors, Wilkie believes the successful capital raising in itself represents a big vote of confidence in Arasor management’s abilities.
He says this week’s placement had become necessary due to various unforeseen operational developments. The company currently has some $34m in accounts receivable and some large payments have to be made before the end of October. He hastens to add Arasor won’t be back for extra capital anytime soon.
“If investors are still holding out in the hope they can buy Arasor shares at the next capital raising I suggest they start buying on market now because Arasor won’t be back for extra capital in the Australian market for some time”, Wilkie says firmly.
As a token of strong confidence in the company’s future, and to show their belief the share price has fallen too low, several members of the company’s management team had enquired about buying additional shares through this week’s placement. However, Wilkie says, stock market regulations didn’t allow them to do so.
Instead, Arasor management had sub-underwritten part of this week’s $12m share placement. As the offer closed oversubscribed, none of them received any additional stock. He says major shareholders such as Goldman Sachs and Macquarie Bank have taken up their pro rata share of this week’s placement, showing their ongoing support.
This week Larry Marshall, one of the directors in the company, purchased an extra 20,000 shares on market. Wilkie says he wouldn’t be surprised to see more members of the management team follow-up with purchases of their own. “There’s an overall feeling [inside Arasor management] the share price is too low”, he says.
Last week’s revised guidance for the company’s financial performances in FY07 (year to December) and FY08 was the result of Arasor management sticking to its conservative policy, Wilkie says. He explains the $4m in bad debt provision relates to outstanding payments yet to be made by BSNL. As BSNL is owned by the Indian government the company has little doubt those payments will eventually be received.
The decision to expand the roll out of the Indian Wimax/Wi-Fi project with BSNL to additional suburbs, instead of Bangalore, had the biggest impact only on this year’s financial projections as it led to the deferral of some $15m in revenues. Wilkie explains the request from BSNL followed the takeover of Hutchison’s Indian operations by Vodafone with the latter indicating it would seek to aggressively expand its foothold in the country. Vodafone currently has a market share of circa 5% in the country versus some 30% for government owned BSNL.
It is BSNL’s intention to firmly defend its own share of the Indian market and thus followed the request to Arasor management to increase the geographical reach of the initial project roll-out in Bangalore. For Arasor this means the Indian project will this year consist of 95% reception equipment and only 5% transmission gear. Wilkie explains the company’s gross margin on the first set of products is a little higher than 10% versus 35% for the transmission equipment. This explains the adverse product mix mentioned in last week’s announcement.
One positive is that the company will be shipping more transmission equipment next year and this should push the product mix into a more favourable balance.
BSNL hasn’t been the only major customer causing (positive) headaches for Arasor management. Electronics giant Sony decided to accelerate its laser TV screen development program and this triggered $4m in extra Research & Development costs for the company. Again, the Sony decision is intrinsically very positive for Arasor, Wilkie points out, but it is also co-responsible for the company not achieving its earlier guidance for the current financial year.
Arasor is likely to beat its $30m profit guidance for fiscal 2008. It’s not something Wilkie explicitly said during the telephone conversation -after all he is limited by strict stock exchange rules- but call it the intuition of a financial journalist.
The feeling was reinforced by Wilkie’s admission that last week’s revised guidance does not take into account the recently announced acquisitions, or anticipated orders from the Sony laser TV development.
On Friday afternoon Arasor shares were trading 1c higher at $2.08.
