THE latest listed company to jump on the electronics manufacturing services (EMS) bandwagon is loss-making chicken egg producer LTKM Bhd.
The company was subject to a reverse takeover by an EMS player called Local Assembly Sdn Bhd, based in Gelang Patah, Johor.
Local Assembly was established in 2000 and manufactures injection molded electronic, electrical and plastic components. Its main business comes from three multinational companies located in Singapore and Malaysia.
The question is, is LTKM entering the game too late?
EMS stocks were all the rage not too long ago.
Stocks like VS Industry Bhd
and SKP Resources Bhd. had reached record highs from mid-2020 to the end of 2021.
However, a combination of factory closures due to the Covid-19 pandemic, labor shortages and supply chain disruptions has turned some investors away from EMS stocks.
Tech stocks are also out of favor globally, with the Nasdaq Composite Index falling about 16% year-to-date.
Concerns about rising interest rates and rising inflation prompted some investors to abandon riskier assets, such as tech stocks.
There are also environmental, social and governance issues in the EMS sector, with concerns over labor issues that breach international standards and could drive away multinational customers.
LTKM is offering to acquire 100% of Local Assemby at a price of RM336 million, to be paid by RM100 million in cash and 393.33 million new LTKM shares at an issue price of 60 sen each.
On a positive note, the Local Assembly reported impressive numbers.
Its revenue increased from RM65.6 million in its fiscal year ended December 31, 2019 (FY19) to RM78.9 million in FY20 and RM116.35 million in of FY21.
Profit after tax increased from RM7.9 million in FY19 to RM14.2 million in FY20 and RM20.06 million in FY21.
The company is debt free and enjoyed a net profit margin of 17.2% in FY21.
Local Assembly co-founders Chai Voon Sun, Gurmakh Singh Ajmer Singh and Wee Thian Song, who will become majority shareholders of LTKM, have provided profit guarantees in connection with the proposed acquisition.
The profit guarantee implies a minimum after-tax profit of RM28mil for FY22 or no less than a combined RM50mil after-tax profit for FY22 and FY23.
In terms of valuation, Local Assembly is acquired at a price-earnings (PE) ratio of 16.8 times its FY21 earnings after tax.
Taking into account the profit guarantee, the valuation of the Local Assembly stands at 13.4 times based on the average after-tax profit of RM25mil, according to LTKM’s filing.
Major players EMS VS Industry Bhd and SKP Resources Bhd are currently trading at historic PEs of 15x.
Therefore, the deal seems to be benchmarked on these companies, although it is unclear whether Local Assembly is as advanced as VS and SKP, in terms of technology patents and innovative processes.
LTKM has not yet responded to questions from StarBizWeek.
Interestingly, a well-known corporate personality is pictured as a shareholder of the Local Assembly.
Datuk Seri Chiau Beng Teik and his son Chiau Haw Choon own 20% of Local Assembly and will eventually own a stake in LTKM following the reverse takeover.
Chaiu and his son are known as the owners of Chin Hin Group Property Bhd.
There were also investors ahead of the initial public offering in solar energy solutions provider Solarvest Holdings Bhd. which was listed on the ACE market in November 2019.
To recap, other aspects of LTKM’s proposed corporate exercise involve a major shareholder buyout of the publicly traded company’s loss-making egg business, a return of capital to LTKM shareholders of 1, RM11 per share (which will fund the main owner by buying out the egg business) and a restricted offer to sell 230 million LTKM shares at 60 sen apiece to raise some RM138 million.
There will also be a consolidation of two existing LTKM shares into a single share.
The company name will be changed to LA Technology Bhd.
Shares of LTKM closed at RM1.40 yesterday, giving it a market capitalization of RM200 million.
LTKM Executive Chairman Datuk Tan Kok and his family have indicated that they will step down as LTKM directors once the proposals are completed to focus on running the poultry business.
He said the proposed divestiture comes amid a difficult operating landscape that has impacted the company’s ability to pay dividends over the past two years.
Challenges facing the poultry industry, he said, include overcapacity, declining average selling price of eggs, high raw material prices and difficulty in controlling disease outbreaks.
“Fundamentally, the proposals are intended to reward our shareholders for the proceeds from the sale of the company’s existing poultry business while allowing them to continue to participate in the new EMS business,” he said.
In a filing with Bursa Malaysia, based on research by Protege Associates Sdn Bhd, LTKM pointed out that the EMS market in Malaysia is expected to continue to grow, supported by the growing adoption of e-content and a cluster electronics established in Malaysia providing a large and ready end-user market.
However, the study also noted that on the other hand, short-term purchase commitment from customers as well as reduced order delivery time may pose a challenge for EMS players owing to the uncertainty of the sales volume and timing, resulting in EMS market players being unable to maximize manufacturing capacity utilization.
The study indicates that in the future, exports of electrical and electronic products are expected to continue growing from approximately RM499 billion in 2022 to RM685.2 billion in 2026 at a compound annual growth rate of 8.5%.
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