Cape EMS Berhad (KLSE: CEB) has recently become the centre of attention due to a significant drop in its share price. In response, the company released its Q2 FY2024 results today, providing some insight into the challenges and opportunities ahead.

For the current quarter, CEB reported a revenue of RM166.6 million, primarily driven by its Electronics Manufacturing Services (EMS) segment. This growth was largely supported by key clients in industries such as wireless communications, electronic cigarettes, and light electric vehicles. Additionally, revenue contributions from their recent acquisition, iConn Inc., played a crucial role in bolstering the top line.

For context, CEB acquired iConn Inc. for a total consideration of RM76.6 million, securing a profit guarantee of US$8.0 million over three financial years. This strategic move is part of CEB’s broader vision to enhance its service offerings and market position.

However, the financial results revealed some challenges. Compared to the same quarter last year, CEB’s Profit Before Tax (PBT) dropped by 33.5%. This decline was primarily due to a lower gross profit margin, impacted by the exclusion of sales from thermal energy devices and increased freight costs.

Moreover, there were several unusual items that affected CEB’s profitability. These included higher administrative expenses related to professional fees and stamp duty for new banking facilities, as well as an impairment loss on trade receivables amounting to RM2.2 million.

The impact of foreign exchange gains also played a role. In the current quarter, CEB recorded a net foreign exchange gain of RM2.4 million, a decrease from the RM3.2 million gained in the previous quarter. This reduction, coupled with the increased administrative expenses, further pressured the company’s bottom line.

On a quarter-on-quarter basis, CEB’s revenue increased by 7.8%, rising from RM154.5 million to RM166.6 million, thanks to the continued strength in their key segments. However, PBT fell by 32.7% due to the same factors — higher administrative costs and lower foreign exchange gains.

Looking forward, CEB has indicated in its quarterly report that it is moving towards an asset-light manufacturing model through the acquisition of iConn Inc. This strategic shift is expected to enhance their operational efficiency and focus on cash-generating capabilities, which remain strong despite the current challenges.

With CEB’s share price having dropped substantially from its peak, the big question for investors is whether this presents a buying opportunity in this promising EMS player.