Investment Highlights

• Maintain BUY call recommendation on Cape EMS (Cape) with an unchanged fair value (FV) of RM1.47/share, derived from FY24F P/E of 18x. This implies a PEG of 0.65, which represents a 6% premium than peers’ average of 0.61 (Exhibit 1). We ascribe a neutral 3-star ESG rating to the company.

• Our FY23F-25F earnings are maintained pending completion on the acquisition of the entire equity stake in USA-based iConn for US$16.5mil (RM76.6mil) cash (Exhibit 2) and private placement (PP) of up to 92.3mil new ordinary shares or 10% of Cape’s total outstanding shares in 4QFY24F. These are the salient highlights from an analyst briefing yesterday:
  • The rationale for the sale of iConn is a need for a larger consolidated revenue base together with Cape to accommodate significant demand from Customer T, a USAbased supplier of laboratory instruments and life sciences solutions which was onboarded since FY23. This customer accounts for 25% of iConn’s FY23F revenue. Additionally, iConn, which is a designing and engineering service provider without any physical assembly plants, has been requested by Customer T to have its own manufacturing facilities.
  • After the onboarding of Customer T, iConn’s FY23F PAT should achieve RM7mil-RM8mil, a 40%-60% improvement from RM5mil in FY22. Hence, Cape is confident in the deliverability of the sellers’ combined profit after tax guarantee of US$8mil (RM37.1mil) for FY24F-26F, or an annual average US$2.7mil (RM12.4mil). This is mainly underpinned by Customer T’s strong sales growth prospects.
  • Cape guided for no further merger and acquisition activities, as well as no additional equity fund raising in FY23F following this iConn purchase.
• To recap, we estimated that the acquisition will be EPS accretive by 6%/4% in FY24F-25F, after taking the 10% share dilution into account.

• We continue to like the stock given its favourable position to ride on multiple rising secular growth trends, namely i) adoption of 5G, ii) evolution of digital payment ecosystems, iii) IoTs, iv) EVs, and v) shift towards e-cigarettes from conventional alternatives in USA market.

• The stock is trading at an undemanding FY24F P/E of 14x vs peers such as Nationgate’s 19x and Aurelius Technology’s 17x. Given its unique position of having exposure in multiple growth sectors with a diverse revenue base, we believe the company deserves to trade at a premium compared to peer average of 15x given Cape’s current attractive PEG of 0.49 vs peers’ 0.61.

Source: AmInvest Research - 20 Sept 2023