Result

• FoundPac Group Berhad (FoundPac) posted RM18.4m revenue (+57.9% yoy and +47.5% qoq) and RM3.1m PATAMI (+54.9.9% yoy and +31.9%yoy) in its 2QFY22 result. This was mainly driven by the beginning of contribution of the new segment – Accessory Cables from the acquisition of SDKM (new subsidiary) in Sept 2021.

• Earnings miss expectation. 1HFY22 performance is below our expectation in which net profit only accounts for 43% of our full year FY22 earnings forecast of RM12.8m despite revenue meets forecast (53% of full year forecast) mainly due to the slide of profit margin.

• Higher revenue contribution by the new segment but profit margin disappointed. The cable segment contributed RM5.5m revenue in the quarter which accounted for 30% of the total revenue (2nd largest contributor) but the profit only recorded RM0.12m with 2% profit margin.

• Improved profit margin from the Precision Engineering business. Precision Engineering segment reported RM2.7m profit with 27% profit margin (+4.8ppts yoy and +2.7ppts qoq). We believe it was mainly due to the gradual recovery from the supply chain disruption which caused the increase of material prices. However, the overall profit margin was dragged by the new segment and subsequently recorded 17% PATAMI margin, - 0.6ppts yoy and -1.2ppts qoq.

• Sales spike to Other Asian countries. Revenue contributed by Other Asian countries surged +263% qoq and +357% yoy as most of the products from new segments were exported to other Asian countries.

Comments

• Increase of inventories in balance sheet. During the quarter, inventories recorded RM12.1m which increased 60% from RM5.2m in 1Q22. The fluctuation of raw material prices prompted management to hold more inventories.

• Expecting profit margin to further improve in coming quarters. The drop of profit margin of the Group in FY2021 was mainly due to the raw material price fluctuation amid the global supply chain crisis. Nevertheless, we expect the Group’s profit margin to recover gradually in the coming on the back of stabilisation of supply chain disruption.

• Optimistic on the new segment – Accessory cables. The management is confident on the profit contribution from the new business in wires and cables in coming periods. Meanwhile, FoundPac may leverage on different segments’ customer base to cross-sell products within the enlarged entity.

• Restructure from ‘semiconductor’ to industrial company. Foundpac was fall short the market expectation which the earnings no shown increase instead the profit margin has deteriorating over the past few quarters amid the super-cycle of semiconductor industry. The divert into new segment (Accessory cables) in the quarter and venture into automotive business in the future has prompt the market the Group has restructuring their corporate into industrial company.

Earnings Outlook/Revision

• We maintain our earnings forecast for FY22F at RM13.4m and FY23F forecast of RM 16.7m despite 1H22 earnings below our expectation as we envisage its profit margin to gradually recover from the supply chain disruption.

Valuation/Recommendation

• We maintained the stock with HOLD CALL and cut our target price to RM 0.60 (from RM0.76) on the back of lower PER assigned due to the valuation revision on technology stock on the backdrop of rising interest rate and restructuring of the Group from semiconductor to industrial company.

• Our revised target price is now derived at 19.5x of FY23F EPS (RM 3.1 SEN) which is at its 3-yr’s mean -1 STDV (+0.5 STDV previously) PER. Our target price still renders a 9% upside from its current share price of RM0.55.

• However, we opine that the slump on share price due to the market re-pricing of technology sector since early this year amid rising interest rate and yield. Also, this was exacerbated by the Russia-Ukraine tensions which we think is temporary whilst Foundpac’s fundamental remain intact.

Source: JF Apex Securities Research - 23 Feb 2022