KPS announced that it has entered into a conditional share sale agreement with MDS Advance SB (MDS) for the acquisition of a 100% stake in the company for a total cash consideration of RM85m. We are optimistic on this development for KPS as the addition of computer numerical control (CNC) metal machining complements its existing manufacturing portfolio – plastic injection moulding and electronic manufacturing service (EMS). Besides, the acquisition will enhance the Group’s earnings on the back of these higher margin products. Purchase price is deemed fair, translating to EV/EBITDA multiple of 7.9x and PE multiple of 10.6x. As per the announcement, KPS was given a net profit guarantee of RM8m and RM9m for FY23 and FY24, potentially bumping up Group earnings by 17.1% and 16.1% respectively. Subsequently, our sum of parts-derive TP will rise by RM0.11/share. Earnings estimates are kept unchanged for now pending completion of the deal by 1QFY23. We maintain our Neutral call on KPS with an unchanged SOP TP of RM0.78.
- About MDS Advance. Established on March 2015 in Seberang Perai, Penang, MDS’ core business is in high-precision computer numerical control (CNC) metal machining, which involves metal cutting and milling. The company produces and supplies intermediate products to manufacturers and end-user producers within the machinery and equipment industry. Aside from obtaining ISO 9001:2015 and ISO 14001:2015 certifications, MDS is also licensed to produce machined parts and components for general customers and the medical industry. Its product suite includes precision metal parts and components spanning the medical, semiconductors, and electronics industries.
MDS reported an audited profit after tax (PAT) of RM 5.0m for FYE June 2019, RM8.5m and RM8.6m for FYE 31 July 2020 and 2021, on the back of RM16.9m, RM23.5m and RM22.2m revenue respectively. It is currently undergoing an expansion to double its size, which is expected to be completed in 1Q2023.
- Fair valuation. The acquisition price tag of RM85m in MDS translates to an EV/EBITDA multiple of 7.9x, and a forward PE multiple of 10.6x. Both valuation methods rendered a discount to the acquisition price tag given that its peers’ EV/EBITDA and forward PE multiples were at 16.1x and 18x respectively. We deem the price fair as MDS carries RM1.1m borrowings as at 31 Dec 2021, though there is potential concern of high customer concentration risk. MDS’ top 3 customers contributed c.85% of its total revenue for FY21.
- Financial impact. The acquisition is expected to contribute positively to the Group’s earnings from FY23 onwards. As per the announcement, KPS was given a net profit guarantee of RM8m and RM9m for FY23 and FY24, potentially bumping up Group earnings by 17.1% and 16.1%. The acquisition will be fully satisfied via internally generated funds. The Group has RM413.6m cash-in-hand as at 1HFY22. Net gearing will rise from an inconsequential 0.09 to 0.17 post-acquisition, after incorporating MDS’ total borrowings amounting to RM1.1m and a reduction of RM85m cash for the payment of the acquisition.
- Our take. We are positive on this strategic acquisition as the addition of computer numerical control (CNC) metal machining complements its existing manufacturing portfolio which are largely situated in Penang. In addition, having MDS in its manufacturing arm would enable the Group to move up the EMS value chain.
Source: PublicInvest Research - 2 Dec 2022