Stock thesis:

 

Suprema (KOSDAQ: 236200) is a leading global provider of access control, time and attendance and biometrics solutions.

 

Suprema is 1) in a good position in a growing market of biometrics solutions, 2) currently undervalued compared to its peers and 3) has a very strong balance sheet which will buffer the current volatility in the short-run.

 

Reasons to buy:

 

  1. The second largest player in biometrics solution market:

 

Biometric reader refers to any device that reads the identity of a person by comparing some attribute of their physiological being or behavioral traits against a sample.

Source: ScienceDirect.com

 

As you can imagine, the industry is growing rapidly. The global biometric system market size is expected to grow from USD 33.0 billion in 2019 to USD 65.3 billion by 2024; it is projected to grow at a CAGR of 14.6% during the forecast period.

 

Major factors driving the market growth include the increasing use of biometrics in consumer electronics devices to provide seamless access over different applications, rising number of government initiatives to adopt biometrics, growing need for surveillance and security due to the threats of terrorist attacks, and increasing penetration of biometric technology in automotive and enterprise applications. The chart below illustrates how rapid biometric market is growing.

Source: Markets and Markets report

Biometric market

Source: IHS Markit

 

Suprema is the second largest player in access control biometric readers, based on IHS market published in 2017.

 

Market share of biometric readers

Source: IHS Markit

 

One of my main stock investment principles is to invest in a good quality, top market dominant company in a rapidly growing industry. Hold onto the stock for few years, and the company will grow.

 

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  1. Current undervaluation:

 

The current PER multiple of Suprema is around 12.0X based on 4Q of 2020, which is really low compared to its other tech, bio solution peers.

 

Potential reasons for low valuation may include:

  • Management board members has sold its stocks at peak price, leading the investors to believe that they are not interested in supporting stock price; and
  • 2Q of 2020 has reported earnings shock.

 

With regards to the first point, while it may be true that management board members may not be interested in supporting stock price at their best, I still believe that in the long run, stock price is correlated with earnings, not what board of directors do as long as the fundamental growth prospects remain intact.

 

With regards to the second point, I believe that earning shock in 2Q of 2020 is largely due to the COVID-19 effect, which is temporary as it affected exports. Being the second largest player in a growing market, Suprema has the potential to overcome short-term downturn and grow.

 

  1. Strong balance sheet:

 

Based on 2Q 2020 financial statement, Suprema has a very solid balance sheet to buffer short-term volatility.

 

Out of its total asset of 151.7 billion KRW, cash and cash equivalent short term assets take up 40.7 billion KRW, which is about 30%.

 

Its liability is at about 6.1 billion KRW which pales in amount greatly compared to its asset. Furthermore, because of its conservative management policy, Suprema does not have any borrowings. The net asset (asset – liability) is 145.3 billion KRW.

 

I attach an excerpt from 2Q 2020 consolidated financial statement translated from Korean.Suprema balance sheet

Source: 2Q 2020 Suprema financial statement in Korean

 

Such a strong balance sheet provides a buffer against short term adversity, such as COVID-19.

 

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Chart:

 

While in the last three years there has not been much appreciation, I strongly believe that it was partly due to a typical value stock not having a catalyst.

 

Suprema stock price

Source: Capital IQ

 

However, the COVID-19 pandemic has accelerated booming un-tact industry and more demands for biometric solutions to wean-off from traditional contact methods of identification.

 

Risk:

 

There are a number of risks to buying Suprema stocks.

  • The spike in the number of and spread of COVID-19 may dampen the demand for mobile phones and biometric solution products;
  • Majority shareholders and Board of Directors sold massive number of stocks when the stock its record high in January 2020;
  • The pace of technological innovation may accelerate, and there may be alternative substitute for Suprema’s products, albeit unlikely; and
  • Depreciation of Korean won is making stock investment in South Korea unfavorable for foreign investors. I have presented my thesis on KRW/USD exchange rate here;

 

Conclusion:

 

Despite sky-rocketing valuation of most of technology and un-tact stocks, Suprema’s valuation has remained very attractive due to reasons that are not necessarily related to core competency of its products or its market position. Being the second largest market maker in a growing industry with strong balance sheet to endure short-term volatility and potential for appreciation, I strongly believe Suprema is a great buy at this valuation.

 

Disclosure: I am long Suprema. I wrote this article to myself, and it expresses my own opinions. I am not receiving compensation for it other than from the Macrotrend. I have no business relationship with any company whose stock is mentioned in this article.

 

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