Valuation / Recommendation

We have a SUBSCRIBE recommendation on Edelteq Holdings Berhad with a target price of RM0.34 based on FY24F EPS of 1.7 sen and a PE of 20x in line with its peer’s average.

We like the stock for its attractive expansion plans and high technical capabilities, well-positioned to leverage on the growth of the semiconductor industry which is forecasted by IDC to grow at a 5-year CAGR of 4.93% from 2021 to 2026. The Group has a 0.0099% and 0.072% market share by business value in design and assembly of IC BIBs and supply of PCBs, and design, development, and assembly of ATE and factory automation in Malaysia. The target price represents a potential return of 42.0% over the IPO price.

Investment Insights

Strong customer base. The company has a strong portfolio of customers consisting of multinational IDMs and OSATs located in Malaysia, Singapore, Thailand, China, and United States. The company is able to maintain a good relationship with its major customers spanning from 1 year to 19 years through repeat orders.

Strong technical capabilities. The company is able to develop products to support the IC assembly and test processes and adapt its technologies and products to suit the evolving nature of the semiconductor industry. The company have been developing IC burn-in boards that are able to test different types and sizes of ICs. The company is also able to customise ATE for IC assembly and test processes, and provide value added services by refurbishing used IC assembly and test consumables and machines to increase its lifespan. With the wide range of products that support the IC assembly and test processes, the company is able to cross-sell its products to customers and increase its sales.

Attractive expansion plans. The company intends to expand its production capacity via the construction of a new factory at Batu Kawan, Penang. The factory will have a built-up area of approximately 43,500 sq. ft, where around 26,000 sq.

ft will be allocated for production space, 4,700 sq. ft for storage space, and around 12,200 sq. ft for office space. Upon completion of the new factory, this will increase its annual capacity for the IC burn-in boards, PCBs, refurbishment of dicing blades, refurbishment of PCB gold fingers to 34,450 pieces, 1,690,000 pieces, 52,000 pieces, and 240 pieces.

Experienced management team. The company is managed by CEO Chin Yong Keong along with key senior management team who has more than 20 years of experience in the semiconductor industry. The company was able to achieve a 3- year revenue CAGR of 25.3% and a 3-year profit after tax CAGR of 114.4% from FY19 to FY22.

Risk factors. (1) Skilled labour shortages. (2) Material supply chain disruption.

Source: Mercury Securities Research - 12 May 2023