Valuation / Recommendation

We have a SUBSCRIBE recommendation on Cape EMS Berhad with a target price of RM1.53 based on FY24F EPS of 8.5 sen and a PE of 18x in line with its peer’s 5-year average. We like the stock for its attractive growth prospect on the back of its expansion plans for its EMS and aluminium die cast business. The target price represents a potential return of 70.0% over the IPO price.

Investment Insights

Diversified customer base. The company serves a diverse set of customers from the industrial and consumer sector, providing an overall larger market to grow and sustain its business, and to mitigate against unfavourable business conditions in 1 industry sector.

Additional floor space and capacity for EMS operations. The company plans to expand its factory floor space via the New PLO 227B Factory to accommodate business expansion for its existing and potential customers. The company’s factory floor space for EMS operations will increase from 332,771 sq ft (as at FPE 2022) to 463,471 sq ft by 1H24.

The company also plans to further expand its Electronic Manufacturing Services (EMS) business by investing in 4 new automated production lines for refill pods at its Senai 227 Factory to cater for the expected expansion of EMS for electronic cigarettes. The new production lines are expected to increase capacity by approximately 133% from 3.3m pieces per month to 7.7m pieces per month by end of 2024, allowing more room for revenue and profitability growth going forward. As at LPD, the company has 2 cleanrooms which houses 8 automated production lines, 2 automated blister packaging lines for refill pods and 1 production line for disposable cigarette sticks.

New capacity to spearhead growth. In February 2022, the company acquired a new production facility (Tebrau 6 Factory) with the intention to expand its aluminium die cast business. The company plans to purchase and install 10 new production lines comprising furnaces and die casting machines, and related machinery and equipment such as 9 units of robotic pick and spray equipment, 2 units of CNC lathe machines and 3 units of rotary screw air compressors which are expected to be installed progressively, commencing installation in 1Q23 and complete installation by 2Q23.

Experienced management team. With the leadership of its MD & Group CEO Ms Tee Kim Chin (Christina) who has approximately 30 years of experience in the EMS industry, the company was able to achieve a 3-year revenue CAGR of 182.5% from FY19 to FY21.

Risk factors. (1) Failure to secure orders from customers. (2) Raw material shortages arising from supply chain disruptions.

Source: Mercury Securities Research - 21 Feb 2023