Introduction

KOBAY has been the “hot stock” going around the market due to its recent share price movement. The company had a stunning 351.3% YTD growth in terms of share price. And as a value investor, this leaves me puzzled – is this purely the market sentiment favouring precision engineering, or another gem to be uncovered?

To answer this million-dollar question, we must first find out the business model, financials, and finally – valuation of the company.

Business Model

Backdated to 1984, KOBAY was founded as a precision tool, dies and moulds maker. The company had expanded rapidly, and shifted to CNC machining, metal fabrication and surface treatment in a decade of time. Due to their rapid growth, the company was also listed in 1997.

Post-listing, KOBAY had acquired AS91000 and NAPCAP certification, which is two key certifications for businesses to venture into the aerospace division. Bear in mind that at this point, the company is involved in semiconductor, E&E, oil & gas before venturing into the aerospace precision engineering business.

The management did not seem to half their growth as they quickly leaped into the property development sector and launched their maiden project in Langkawi. Sadly, 2016 to 2020 has been almost the worst performing years for property sector due to high overhang properties around the market. In terms of volume, the overhang properties had a CAGR of 18.9% between 2016 to 2020.

In 2019, the company decided to refocus on their precision engineering business and started to provide total metal fabrication and HLA solutions across the semiconductor, aerospace, and a very small fraction of medical & life science business.

However, the pandemic seems to have piqued the management’s interest to venture deeper into the healthcare industry. Dated 5^th July 2021, the company issued a circular to shareholder for the proposal acquisition by KOBAY of 70% stake in Avelon Group. Under the umbrella of Avelon Group, there are a total of 5 companies, which includes:

• Avelon Healthcare Sdn Bhd
• Galaxis Healthcare Sdn Bhd
• Avelon Arise Sdn Bhd
• Galaxis Pharma Sdn Bhd
• Arise Healthcare Sdn Bhd

The acquisition would cost a total of 47.7 million in cash, payable to the shareholders of Avelon Group. So how do they define the 47.7 million valuations? Historically, Avelon Group had achieved 8.51 million in profit after tax in 2020 financial year end. Avelon Group also had a total profit guarantee of 25.54 million for the 3 subsequent financial year (2021 to 2023), which is equivalent to 6.81 million per financial year.

By taking 6.81 million and taken into consideration of 70% stake in Avelon Group, KOBAY is paying approximately 10 times PER, in which the industry average had 14.40 times to 16.10 times PER by comparison.

KOBAY has also the call option rights to purchase the remaining 30% stake of Avelon Group for a sum of 16.80 million, but that ultimately depends on the delivery of profit to KOBAY.

In the near future, KOBAY will be a mini conglomerate of precision engineering, property development and pharmaceutical company.

Financials

For the past years, KOBAY had been delivery quite solid results despite the impact of COVID-19. The revenue and profit after tax had a CAGR of 17.18% and 75.08% respectively due to the low base effect in 2016 financial year end.

A major chunk of revenue of the company still comes from manufacturing (precision engineering) business. We would not be surprised if the property development’s segment performance were dragged by the COVID-19. Despite property development sector had a progressive billing, sales conversion revenue recognition model, the lacklustre of demand for properties in Langkawi would no doubt hamper the sales, hence decreasing the final sales conversion of the company.

The latest financial report announced by the company shown that KOBAY had a war chest of 71.87 million in cash, standby. A bulk of it will be utilized for the acquisition of Avelon Group.

The company also had 3.32 times of current ratio, and a negative gearing ratio due to the company having net cash on hand.

Valuation

Here comes the tricky part – valuation. KOBAY is currently trading at 44.79 times PER, 0.56% dividend yield and 6.56 times of PTBV. Historically, KOBAY had a median trailing PER of 17.40 times, and the current PER certainly had reflected growth opportunity in KOBAY.

The existing 3 quarters for 2021 financial year had a total of 18.25 million in profit after tax, which is equivalent to 76.3% of 2020 financial year’s full year profit after tax. Assuming KOBAY had a modest 6 million in profit after tax in the next quarter, the full year profit after tax would be 24.25 million. KOBAY had 306.28 million total number of shares, and the EPS should be 0.079. If we factor in the additional 4.77 million in profit after tax from Avelon Group, the forward profit after tax should be around 29.02 million, hence the EPS will be adjusted to 0.095.

As at LDP, KOBAY is trading at RM3.58. The forward EPS, inclusive of Avelon’s group contribution would be approximately 37.68 times PER.

However, don’t forget KOBAY has been growing on a yearly basis without fail for 5 financial years. A modest +20% in profit after tax for 2022 financial year should not be overexaggerating, and the final adjusted EPS should be around 0.109.

Thus, the forward PER should be priced around 32.84 times.

We understood that the recent spike in demand for semiconductor companies should – in reality, gives KOBAY a premium in terms of valuation. Sadly, Malaysia market generally have a non-friendly attitude towards conglomerates, or one with multiple business structure – as they do not know how to price it.

The recent spike in valuation for KOBAY, in my humble opinion, is certainly not from the pharmaceutical business. During the company’s briefing with Rakuten Trade, when questioned if they had contract from First Solar, the management did not deny the rumour. Perhaps, the recent speculation is all about the contract from the future solar manufacturing division.

And if true, maybe KOBAY truly deserve the current pricing. Perhaps even more.