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Author: HumbledInvestor   |   Latest post: Fri, 2 Jul 2021, 9:24 AM

 

[Humbled Investor] Turnaround story – Scope Industries Berhad

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Scope Industries Berhad (“Scope”) is mainly involved in Electronic Biz, specifically in printed circuit board (PCB) assembly for more than 25 years (contributed 67% of FY2020 total revenue). Over the years, PCB division has expanded into completed electrical and electronics product assembly for reputable OEM manufacturers and MNC companies.
 
Scope also involved in cultivation of palm oil business but its not so profitable so we will not be focusing on palm oil segment today.
 
What is so interesting in Scope? Scope has seen a drastic change to its major customers from FY2019 to FY2020. (Pic 2) Scope lost most of its key customers in FY2019 but substituted with one customer that contributed RM8.7mil to its FY2020 revenue.
 
Coincident or not, revenue from Taiwan also contributed the same amount of revenue as Customer A of RM8.7mil in FY2020. (Pic 3) So who is this big Taiwan customer anyway?
 
If we drilled down into the top 30 shareholder list, we will find the emergence of a new shareholder in FY2019 annual report, namely Inventec Appliances Corp (“Inventec”) with 32mil shares, being top 5 major shareholder.
 
Who is Inventec? Inventec is public listed company in Taiwan with market capitalization of about RM14bil (equivalent to the size of QL Resources, its big..). Inventec is an ODM manufacturer involving in making AirPods, notebook computers and mobile devices.
 
Why Inventec is interested in Scope? Due to trade war, Scope (who might be the new OEM manufacturer to Inventec) stands a good position in Malaysia to be benefited from US-China trade war. In any case, Scope has been expanding its capacity since FY2019 where it has done a private placement in 2019 and invested RM13.8mil and RM6.09mil in FY2019 and FY2020 to upgrade its production facilities, including purchase of new machinery and construction of additional production area in existing factory.
 
Scope also changed its strategy to focus more on high quality products and started to manufacturer box-build products for new customers which complements their PCB business. It is likely the change in strategy is because of the newly secured customer – Inventec.
 
What are the benefits of Inventec joining the party? With more incoming orders, Scope has recently announced a private placement in September 2020 (with an issue price of RM0.175) where part of the placement of RM7mil is earmarked for capacity expansion which involves setting up a new factory for its PCB business. However, Scope only predicted that the expansion will only cost around RM10mil from the September 2020 announcement. But the new factory is actually cost more than that and this is where 19 March 2021 announcement (Friday) came in.
 
Proposed rights issue and ESOS – Scope has announced a 2 for 1 rights issue at an issue price of RM0.175, represent a discount of 32.35% to TERP based on 5 day VWAMP! (last private placement only represented about 9.5% discount) This is a huge discount for existing investors.
 
But who are the main beneficiary? – In the announcement, Inventec has actually entered into an SPA whereby Inventec will buy out all the right issue shares from the 2 major shareholders which will then raised Inventec major shareholdings from existing 4.2% to 10% (minimum scenario) or 7.3% (maximum scenario) without accounting for ESOS dilution. Besides, understand from theedge articles back in February 2019 that the Inventec’s cost to acquire Scope’s shares is at RM0.15 per share. (Pic 4) Therefore, we can say that the entry price for Inventec is around RM0.15 to RM0.17 per share.
 
With Inventec new undertakings to subscribe the rights shares in full, this will further boost existing investors’ confidence in addition to the expansion plan that Scope is going to embark on. Scope is currently constructing a new factory building to increase its existing production floor space by 154,000 sqft from 145,200 sqft to 299,200 sqft on a 2.5 acres land in Parit Buntar, Perak which is next to its existing factory. Scope Group envisages that the cost to put this production facility in operation, including the machinery and equipment, is approximately RM36 million.
 
Will there be further rights issue going forward? Given that the issue price has been fixed at RM0.175, it is likely that all existing shareholders will subscribe the rights shares to enjoy the upside now as it is currently trading at RM0.295, representing more than 60% guaranteed gain if the price stay unchanged. Under the maximum circumstances where RM50mil could be raised, together with the existing RM7mil private placement that has been raised previously, it is unlikely that there will be another cash call going forward with the new factory cost of about RM36mil. In the short term, investors might react negatively like usual to rights issue announcement, but long term wise, Scope will be another interesting counter to monitor although the valuation is not cheap at the moment.
 
The commitment for expansion can be seen in the increase in labour worker. Since July 2020, Scope has employed additional 453 workers for PCB business from 720 workers to 1,173 workers as at 28 Feb 2021 (an increase of 63%).
 
What are the other upside of Scope? Scope has also hired experienced managers to improve production flow and reduce production cycle time (production efficiency could be improved). Besides, if we look at historical financials, we can observe that 2 quarters revenue in FY2021 has already surpassed FY2020 revenue and FY2019 revenue by 25% and 57%. (Pic 5) This shows that despite pandemic, Scope revenue has actually improved yoy and even better in FY2021.
 
What are the risks? Moving forward, Scope Group expects more supervisors and assembly workers are required in line with its Electronic Business expansion. Staff costs and operational expenses need to be controlled to sustain or improve the profit margin. Scope has been loss making since FY2019 and could return back to profit in FY2021. Another risk would be the high concentration risk from increased Inventec orders.
 
What are your thoughts?
 
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All information provided here should be treated for informational purposes only. It is solely reflecting author's personal views and the author should not be held liable for any actions taken in reliance on information contained herein.
No buy call. No sell call. No bullshit. Only content.
 
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greedy44444 Right issue money better use to buy Pnepcb
22/03/2021 12:36 AM


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