Mesiniaga – I am still waiting for its killer app

[i4value]

At the turn of the century, Mesiniaga delivered double-digits ROE. It was in its heydays with more than 50% dividend payout ratio. Fast forward 20 years and the company is a pale shadow of itself. Its average ROE over the past 3 years was only 5%.

Mesiniaga is an ICT services provider and over the past 20 years the technology landscape had changed. To be fair that company had long ago recognized this and had sought ways to venture into new ICT areas.

Its Annual Reports over the past decade were full about how it is venturing into new tech areas, etc. Unfortunately, while the products and services may be new to the company, whatever it had done was not enough to return it to its glory days.

We all know that the tech industry evolves quickly, and tech companies continuously innovate to stay competitive. But it does not mean that innovation will always turn out to be the killer one. I think this is the fate of Mesiniaga. So while it is financially sound, it would not be a share market darling until and unless it finds the right “new tech product.”

[weijian]

Generally, ICT distributors/integrators have relatively low margins and may have to depend on scale. I took a quick look at Mesiniaga (FY23 and FY01) and also compared it with another SGX-listed ICT provider Multi-Chem (in this case, a cybersecurity solution distributor)

Below comparison made without currency conversions:
Mesiniaga FY23: 82mil total SGA cost (992 staff costing 73mil) on GP of 87mil (Revenue=259mil). PBIT=3mil
Mesiniaga FY01: 32mil total SGA cost (434 staff costing 29mil) on GP of 67mil (Revenue=248mil). PBIT=26mil
Multi-Chem FY23: 62mil total SGA cost (721 staff costing 40mil) on GP of 95mil (Revenue=658mil). PBIT=36.5mil

(1) Basically in the last 22years, revenue has grown by ~4%. But if we account for inflation (since MYR depreciation is well-known), then we could say that it has probably lost revenue.

(2) Mesiniaga actually had better GPM in FY23 than FY01, such that its FY23 GP is actually ~30% higher than FY01. The main difference actually came from much higher SGA costs (in this case, staff costs) that basically explained the difference in PBIT over the last 22years.

(3) So based on this quick/dirty check, Mesiniaga has gotten less buck for its employee cost over the years. Is it a scale issue? Probably not, since it had relatively unchanged revenue back in FY01. In FY01, avg salary/employee = 29mil/434=67k/annum. By FY23, avg salary/employee = 73mil/992 = 74k/annum. Since the avg salary has just increased ~0.5% per annum over the last 20years, we could probably say that salary increases wasn't the problem. But since It had a 130% increase in staff strength to produce negligible (or reducing) revenue growth, employee productivity (or value add) has reduced causing the regression.

[i4value]

I am not sure how much of the manpower cost is captured under gross profit margin vs under the SGA. As such I would prefer to look at NOPAT margin. It went from 8 % in 2001 to 1% in 2023. Declining productivity is probably the symptom. As its products and services became commoditized, it has failed to find new apps that can provide better NOPAT margin. That is the challenge being in the ICT sector.

[weijian]

hi i4value,

A mfg plant will have different segments for manpower costs:
(1) The COGS will include raw materials + direct production manpower costs,
(2) The SGA will include manpower in supporting roles (procurement etc).

Since Mesiniaga is in the distribution business, the COGS largely will be raw material costs (supplier) since there is little/no production. Mesiniaga actually itemized their costs rather than a "COGS one liner". So I believe the GPM I calculated while isn't accurate, but should be approximately correct.

I know nothing about the ICT sector (and how Mesiniaga actually makes money). But the 130% increase in staff strength just doesn't suggest that commoditized products/services is the only reason for its change of fortunes. I mean - if I were a durian stall owner that had to witness my msw durians that I used to sell for m58/kg drop to rm15/kg, I would attempt to sell more volume to make up my revenue drop. I would also try to scale up to reduce my %fixed costs. But I definitely would not hire more staff.

[i4value]

When Mesiniaga first started, there were relatively more equipment sales due to its "arrangement" with IBM. I think that as time went by, it lost some of its "arrangement". I suspect that as computers become more "commoditized" its margin drop. Over the years, the sales of equipment also became a smaller part of its revenue so that the GP contribution dropped.