ECA Integrated Solutions (ECA) is an automated manufacturing solution provider. The Group's purpose-built automated manufacturing solution is customised accordingly for each respective customer based on their manufacturing requirements. ECA's core expertise is in providing integrated production systems to its customers. It also designs, fabricates, configures, tests and commissions standalone automated equipment. ECA's customer base predominantly comprises multinational manufacturers that serve or operate in a variety of industries, including but not limited to, semiconductor, automotive, solar, telecommunication and other commercial and industrial products.

Moving forward, ECA intends to expand its output and enhance its capability by acquiring new machineries and recruiting skilled technical personnel, in order to further strengthen its standing as an automated manufacturing solution provider. Also, ECA intends to tap into the provision of smart factory solutions as the Group's new solutions offering. We believe bullish prospects on automation demand would spur strong earnings growth for the group over the next 3 years. Hence, we initiate coverage on ECA with an Outperform rating and TP of RM0.32 based on 16x FY23 EPS.

• US-China trade diversion sweet spot. ECA is riding on the positive spillover effects in terms of the relocation of industries from China and the US to this region in order to minimize future risks arising from increased US-China tensions. This is reflected in ECA seeing significant jumps in demand for integrated production systems in Malaysia since the trade spat between both countries started in 2019.

• Competitive strengths. ECA’s competitive strengths include: i) proven track record, ii) securing of recurring orders and referrals from its customers, iii) customisable solution that suits various manufacturing needs, and iv) experienced and technically-skilled management team.

• Growth drivers. Key drivers include: i) growth in manufacturing-related industries, ii) increasing process transformation to automate operations and shift towards smart factories, iii) increased outsourcing and relocation of manufacturing activities to Southeast Asia and Eastern Europe, and iv) government initiatives to develop the manufacturing industry. It is worth noting that the current plant capacity can generate almost more than 5x of the current revenue.

• Key risks. Key downside risks, among others, include: i) dependency on performance of industries in which its customers operate in, ii) competition from other industry players, iii) dependency on certain major customers, iv) absence of long term contracts, v) potential revocation or expiry or non renewal of its pioneer status, vi) unintended leakage of confidential information to unauthorised third parties, and vii) exposure to fluctuation in foreign exchange risks

Source: PublicInvest Research - 10 Nov 2022