PETALING JAYA: The acquisition of US-based company iConn Inc is expected to bode well for Cape EMS Bhd
as it will allow the group to benefit from the former’s present business and tackle new opportunities, according to UOB Kay Hian (UOBKH) Research.
The research house said the acquisition would reflect positively on Cape EMS’ future earnings.
Headquartered in California, iConn is involved in the virtual manufacturing and design for manufacturing, engineering and sourcing.
It has a wholly-owned subsidiary in China and a diversified customer portfolio which includes the top global multinational corporations.
“iConn comes with profit guarantee terms of an aggregate of US$8mil for the period commencing Jan 1, 2024 until Dec 31, 2026, with the sellers to make up for the shortfall should the aggregate profit after tax fall below this amount during these periods,” the research house said.
UOBKH Research added that iConn is an existing customer of Cape EMS whereby it provides electronic manufacturing services (EMS) for technology-based access points and mechanical apparatus for life science and advanced medical equipment.
In addition, iConn is the Cape EMS group’s supplier for electrical interconnect components that Cape EMS uses for its other customers.
Considering that iConn’s unbilled purchase orders stood at US$7.6mil, UOBKH Research said such an acquisition would enable Cape EMS to expand its range of services under its EMS segment, thereby improving its appeal to existing and potential customers.
“iConn’s strong design capabilities and involvement in customers’ product infancy stage will allow Cape EMS to gain first mover advantage and traction with customers who are looking to scale for mass production,” the research house noted in a report.
Furthermore, UOBKH Research is positive about Cape EMS due to its cleanroom setup and automated operations for key customers as well as a healthy inflow of trade diversion-related orders.
“This suggests that more advanced EMS jobs could be reaped with such a setup amid the prospering trade diversion opportunities.
“Management has also shared that the ramp-up indicates this key customer could lead to its production lines being doubled, with Cape EMS being the lion share supplier for this key customer,” it said.
UOBKH Research said in terms of its growth, Cape EMS would continue to aggressively scout for new prospects that best fit its mid-volume high mix model.
“Besides promising growth prospects from its wire communication equipment and customer A who will carry the highest gross margin, the group is eyeing for at least three new prospects that could see meaningful earnings contribution as soon as the fourth quarter of 2023,” the research house said.
In line with all the factors, the research house maintained its “buy” call on Cape EMS with a higher target price of RM1.68 a share from RM1.13 previously.
It increased the company’s 2024 earnings by 17% to 18% to account for earnings contribution from iConn and enlarged its share base by 10% to account for the private placement.
“Trading at an undemanding 13.5 times 2024 price earnings multiple which is at 20% to 31% below its peers. We see ample upside from here and we also expect a three-year net profit compound annual growth rate of 40% from 2022,” it added.
