Catalist-listed Asiatic Group (Hldgs) debuted on then SESDAQ in 2003, principally as a distributor of fire-fighting systems. The group has signaled its intention, during its IPO to expand into the power supply business to develop power-related systems such as cogeneration plants.

On…The Nature Of Business

Asiatic has morphed its revenue base, from deriving 92% of its income from fire-fighting solutions in FY02, to an independent power producer. In its latest FY09 results, its power-related business generated a 67%-share of total revenue. Earlier this year, it opted to offload a subsidiary in its fire-fighting segment to concentrate on its energy sector.

In 2005, the company marked its expansion into Cambodia by signing a Power Purchase Agreement to supply energy to the capital, Phnom Penh, via its subsidiary, Colben System. Mid last year, Asiatic inked its largest contract, potentially worth US$475m over a 99-year period, to generate electricity to Phnom Penh Special Economic Zone (PPSEZ), one of 21 economic zones being developed in the country.

The contract is expected to add approximately US$4.8m a year to the Group’s revenue once the power plant with an initial capacity of 10 MW is fully operational in 2009.

…Opportunities

Cambodia’s energy needs are increasing as the country develops. However, at the moment, it is still largely dependent on energy sources from neighbours, Vietnam and Thailand. Reports indicate that Cambodia’s energy needs will increase 10-15% annually and without a national power grid, utility rates are among the highest in the region – a major obstacle to foreign investments.

The Cambodian government is pushing ahead with plans that aim to position the country to be energy self-reliant by 2012. Setting its sights to begin exporting energy to the region by 2016, the government has already approved plans to build four hydroelectric dams, with an additional one mooted for the Mekong. Asiatic, having participated in a Vietnamese venture to build a 44MW hydroelectric plant, is a potential candidate for similar deals.

…And Risks

The notion of investing in emerging economies, by itself, is risky and notoriously hard to value. However, the group has mitigated potential downside by forging deals with state-owned enterprises and ensuring earnings visibility with minimum off-take on capacity. While the latest round of elections in Cambodia has returned the ruling party to power, economic risks remain in the form of weak institutions, graft and spiralling inflation.

Asiatic ended FY09 in a net liabilities position, mainly due to short-term borrowings to fund its power projects in PPSEZ. So, it was a welcomed note when the company revealed, in a recent filing, that it has obtained a US$20m syndicated loan to fund its power project in Cambodia. However, although short-term debt position has improved, net gearing still remains at over 1.5 times – which could impact future borrowings and compel the company to reconsider investment opportunities.

Asiatic's Story

The company has seen earnings grow at over 20% rates in the last five years - what Peter Lynch would categorize as a Fast Grower. Potentially, Asiatic has positioned itself as a niche player in a fast growing industry in high-growth economies. Nonetheless, its more stable fire-fighting systems segment remains well poised as an anchor for earnings, going forward.

Using Closer Look @

Closer Look @ comprises 2 components. The table shows a quick list of important facts and figures. Net gearing refers to the ratio of net debt to shareholders' fund. Net debt is total borrowings less cash. Price and PE ratio are calculated based on the last done price and are trailing. Revenue and earnings growth rates are geometric means over the past 5 years.

The text component reflects research or company’s response to questions concerning future earnings. Peter Lynch stressed that earnings matter and underpin stock valuations in the long run. For the same reason, he is cautious on IPOs, preferring to wait for the company to establish a record.

Some of the companies may be fast growing but have little or no analysts’ earnings estimates. Nonetheless, those who have read “One Up On Wall Street” and are adventurous enough may calculate PE-to-Growth ratio (PEG). For example, a company with a PE of 10 and earnings growth of 20%, PEG=10/20 = 0.5. As a rule of thumb, fast growing companies with PEG less than 0.5 are extremely undervalued, while those with PEG of more than 2 are overvalued.