Highlights

Its wholly owned subsidiary, Simfoni Bistari SB had entered into a Sale and Purchase Agreement with PDC (Penang Development Corporation) for the acquisition of an industrial leasehold land for a total purchase price of RM7.8m, derived based on a willing-seller-willing-buyer basis.

The land is located at Plot 315, Batu Kawan Industrial Park, Daerah Seberang Perai Selatan, Pulau Pinang with a an area of 5.05 acres.

The land is leasehold in nature with 60 years unexpired term and with express condition that it shall be used for electronics manufacturing.

The land is deemed strategically located with close proximity to its existing factories in Bayan Lepas Free Trade Zone and Penang Second Bridge.

It plans to construct new manufacturing facilities to expand the existing businesses and future business opportunities.

Financial Impact

No funding concern as it has RM52.5m of cash as of 3QFY14.

Comments

Not surprising as it has announced this intention (confirming our earlier belief) along with the proposed renounceable right issue with detachable warrants last month. Please refer to our report titled “Candylicious – Right Issue with Warrants” dated 7 July 2014.

Majority of the Right issue proceeds will be allocated for CAPEX to expand production capacity (plant extension, acquisition of land, factories, equipment and machineries) with a budget of RM60-80m, followed by repayment of bank borrowings amounted to RM20m and the remaining of RM18-31m as working capital.

This expansion is crucial to drive future growth as RF’s new plant 5 is already running at near full capacity or utilization rate of 85% although it was recently expended.

Forecasts

Unchanged.

Catalysts

• Wireless communications / mobility / IoT (M2M) / LTE.
• Business diversifications into optoelectronics and T&M.
• Favorable FOREX.
• Continuous effective operational strategy.

Risks

• Single major client risk (Avago) / high dependency.
• FOREX risks.
• Patent disputes.
• Resources / labour shortage.

Rating

BUY, TP: RM3.41

Positives - Synergy from acquisition, 40% dividend payout providing reasonable yield.

Negatives – innovation stalemate in telecommunication.

Valuation

Reiterate BUY with unchanged fair value of RM3.41 based on 15.1x CY15 P/E.

Source: Hong Leong Investment Bank Research - 15 Aug 2014