INTER-ROLLER Engineering is one of the few small companies in Singapore which has built a strong core competency that allows it to hold its own against the formidable multinational companies.

The recent contracts it won are testament to its prowess. They perhaps marked the coming of age of this 24-year-old company, with its years of research and development finally earning it a place among the world's major designers and suppliers of airport baggage handling systems.

And its future, by most accounts, looks rosy.

One of its biggest projects was announced last week - the joint development, design and building of a baggage handling system for the second-phase expansion of Dubai International Airport. Inter-Roller's partner is Siemens Dematic, which has sent a Letter of Intent for the venture. That project will add some $93 million to the group's already strong order book.

Just three weeks back, Inter-Roller said it had, in the fourth quarter of 2003, secured upgrading works for baggage handling systems at five international airports worth a total of about $10.7 million. These are at Tunisia Airport in Africa, Manchester Airport in England, and Jinan Airport, Hangzhou Xiaoshan International Airport and Changsha Huanghua Airport in China.

As at end-September, Inter-Roller had some $93 million worth of outstanding orders. Since then, $20 million has been completed.

The latest few projects will bring the group's total contracts in hand to some $178 million, a level unseen before. And for the record, Inter-Roller has been breaking new highs in its order book in the last year or two.

Most of these projects will have to be completed in the next three years. Even without new contracts and simplistically assuming that Inter-Roller can maintain a net profit margin of about 12 per cent, the group is looking at net profit of some $21.3 million in the next three years. That works out to $7 million a year on average, or 9.5 cents a share.

Based on its last traded price of 90 cents, Inter-Roller is trading at just 9.5 times its base-case earnings. Any new contracts will add to the bottom line. And there are grounds to believe it is capable of continuing to bag contracts.

Started off as a fabricator of conveyor systems, Inter-Roller has developed into a provider of solutions that are integrated with mechanical, electronic control, and computer systems. It now derives more than 90 per cent of its turnover from airport logistics systems. This is a growth area because of the increasing threat of terrorism. As a result, airports around the world are stepping up security measures in their operations and baggage handling systems.

Recurring revenue: Inter-Roller's edge over its bigger competitors is its lengthy experience and pool of engineering talent that allow it to customise designs for baggage handling systems while keeping costs down. Meanwhile, once it has supplied baggage systems for an airport, it is in a good position to take on the upgrading and maintenance work later on, which provides the group with recurring revenue.

Going forward, one of the most crucial issues is how the group will manage its growth. With more projects, it has had to invest more in inventories. That drained $14.5 million of cash from the group in the first nine months of last year. Consequently, cash flows from operating activities was a negative $361,000, compared with cash generation of $8.1 million in 2002. As at Sept 30, 2003, Inter-Roller's cash level is also rather low.

To cater for the expected rise in the volume of work and for R&D, Inter-Roller plans to expand production facilities in Singapore and Malaysia. Unless it is able to convert trade receivables or contract work-in-progress into cash soon, Inter-Roller may need to raise cash from elsewhere. The good thing is its debt level is low and it thus has the capacity to tap banks for loans. On the whole, things are looking up for Inter-Roller. The only drawback is the illiquidity of the shares. Potential investors will thus have to be a patient lot.

《The Business Times》