We initiate coverage on SFP Tech Holdings with a BUY recommendation and TP of RM0.63/share based on 18x P/E on FY23F profits at a deep c.30% discount to the weighted average one-year forward P/E multiple of 26x to reflect: (i) its listing on the ACE market – rendering it less investible to most institutional investors; and (ii) its relatively smaller market capitalisation vs. its peers. We project earnings to grow significantly at a 3-year CAGR of 22% for FY22-24f. At about only 8.5x FY23F earnings in on its listing debut, we believe that this home-grown engineering supporting service provider is a compelling case given its strong foothold in the semiconductor, E&E and solar PV spaces.

Sturdy and steady growth of the ESI. According to Protégé Associates (an independent market research and business consulting company), the Malaysian Engineering Support Industry (ESI) is projected to grow at a sturdy CAGR of 8.9% to a total market size of RM11.7bn from 2022-2026F. Growth in the short term (2022- 2023F) is expected to stem from the recovery in the global economy from the COVID- 19 pandemic. According to the World Economic Outlook January 2022 released by the International Monetary Fund (IMF), the global economy is projected to register a growth of 3.6% in 2022 and 2023 after an expansion of 6.1% in 2021. The Ministry of Health in Malaysia had also announced the transition of COVID-19 into endemicity from 1 April 2022, signalling a normalisation of business operations to pre-COVID-19 times. Global efforts in boosting vaccination rate is also expected to stimulate economic recovery, which will promote the recovery of the ESI in Malaysia.

Faster and better machineries incoming. In anticipation of robust demand and increase in sales orders over the long term from end-user markets, SFP Tech plans to purchase new machineries to support its additional production activities. The group intends to allocate c.39.4% (or RM24.5m) of its IPO proceeds to purchase: (i) 1 new laser cut and punch machine; and (ii) 41 new CNC milling machines over the next 3 years. This would add its number of machines and cumulatively increase the group’s maximum manufacturing production capacity by approximately 25.3% from 520.4k hours/year to 652.1k hours/year.

Aggressive expansion plans. SFP Tech is in the process of constructing Manufacturing Plant 3 – which will comprise a 3-storey factory and warehouse with a 3-storey office building with a built-up area of approximately 319.2k sq ft (which essentially triples the group’s total current built-up area of 152.5k sq ft). This is to house additional machines to produce more complex, higher precision and higher mix precision-machined components, as well as to increase production capacity to cater to the increasing demand for the group’s engineering supporting services. Manufacturing Plant 3 will be mainly utilised for its CNC machining activities. The construction of Manufacturing Plant 3 is expected to be completed in 2QFY22 and be fully operational by 4QFY22.

Impressive earnings growth with no signs of slowing down. Throughout FY18- FY21, SFP Tech registered uninterrupted annual revenue and core net profit growth with a CAGR of 28% and 25% respectively. Going forward, we project SFP Tech’s profit to further grow significantly by 36%, 15% and 17% for FY22-24f respectively – signifying back-to-back record high profits annually, based on our forecasts. This represents an impressive FY21-24f CAGR of 22%.

Initiate coverage with a BUY – TP of RM0.63/share. We initiate coverage on SFP Tech with a BUY recommendation and a TP of RM0.63/share. At about only 8.5x FY23F earnings in on its listing debut, we believe that this home-grown engineering supporting service provider is a compelling case given its strong foothold in the semiconductor, E&E and solar PV spaces.

Source: Hong Leong Investment Bank Research - 20 Jun 2022