Result

• FoundPac Group Berhad (FoundPac) posted RM17.5m revenue (+40.5% yoy but -4.9% qoq) in its 3QFY22 result. This better yoy performance was mainly driven by the beginning of contribution of the new segment – Accessory Cables but the performance of the segment slightly dropped in the quarter (revenue -32% qoq).

• Losses in new segment, Accessory cables dragged earnings. Fpgroup posted RM2.7m PATAMI in 3Q22 which -17.5% yoy and -13.8% qoq which caused by the losses in new segment with higher operation cost and lower revenue.

• Gradually improved profit margin qoq from the Precision Engineering business. Precision Engineering segment reported RM3.3m profit with 30% profit margin (+3.0ppts qoq but -5.5ppts yoy). This is the continuous 2nd quarter margin improved 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.

• Malaysia sales surged but export struggled. Fpgroup’s Malaysia sales has increased 137% yoy and 54% qoq mainly due to the new segment business mainly derived from local customers. However, the export sales of the Group underperformance qoq as the sales to others Asian countries has dropped 35% qoq and to North America -12% qoq.

• Dividend declared. The management has declared a 1 sen dividend per share with the announcement of 3Q22 results. The dividend will be paid on 28 June 2022 and estimated total RM 542.3m will be distribute.

Comments

• Acquisition of new business failed to recover the Group performance. The new segment acquired in Sept 2021 failed to improve the Group’s financial performance as the segment is incurring a loss in the quarter.

• Overall margin still in struggle. The Group’s profit margin continuous drop in the quarter. In 3Q22, the Group’s PAT margin has decreased 11.5ppts yoy and 3.4 ppts qoq. The recovery of margin is later than expected causing by the supply chain disruption. Besides that, the drop of margin is impact by the losses in new segment.

• 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 diversification 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. Hence, the valuation of the Group should not on a par with the high valuation with other semiconductor company.

• Supply Chain disruption poised uncertainties to the operation of the Group. The on-going supply chain disruption led to price fluctuation of raw materials which caused uncertainties on margin. This has brought a challenge to the Group and management.

Earnings Outlook/Revision

• Earnings miss expectation. 9MFY22 performance is below our expectation in which net profit only accounts for 64% of our full year FY22 earnings forecast of RM12.8m despite revenue exceed forecast (84% of full year forecast) mainly due to the continue deteriorating of profit margin and losses in new segment.

Valuation/Recommendation

• Ceasing coverage. We are ceasing coverage on Fpgroup due to lack of immediate catalyst and difficulty in accessing to the management. As such, we are reclassifying our recommendation on the stock from HOLD to NOT RATED.

• Investors should no longer rely on our earnings forecast and recommendation in Fpgroup when making investment decisions. Our last target price for the stock was RM0.60, based on 19x PER of FY23F EPS.

Source: JF Apex Securities Research - 23 May 2022