I-Stone Group Bhd (“ISTONE”), a specialised automation machine maker with an established track record is set to ride the wave of Industry 4.0. Seeking to list on the ACE Market, we recommend BUY with a target price of RM0.21 based on 17.5x PER FY20 as per the industry peers.

ISTONE involves in manufacturing automation business primarily offering design, manufacture and modification services of specialised automation machines as well as provision of Data Management System (“DMS”). The core business is also complemented by machining fabrication and distribution of manufacturing automation software and hardware (robotic arms). The group has over 100 active clients from various industries such as consumer electronics, automotive, robotics and semiconductor, reinforcing ISTONE’s capabilities on the diverse industries of automation expertise. Among the top renowned clients are Dyson, V.S. Group and ATA Industrial having up to 12 years of solid business relationship, with Dyson being the major sales contributor (>65%).

As a strategy to enhance its competency, increasing productivity and efficiency, 10.7% or RM4.2m of the proceeds will be utilised for process and product development. The new products and features in the pipeline are namely deep learning system for vision inspection machine, i-FCT (automated joint-test system) and i-MES (advanced DMS). To improve manufacturing efficiency, ISTONE plans to produce standard modules which will set to reduce project lead time. Another 17.4% is allocated for the construction of new Design and Development (D&D) centre with anticipation of increasing D&D activities, expected to be completed in 48 months after listing. Meanwhile, 13.3% will be used for capital expenditure to upgrade manufacturing capabilities. Lastly, 34.5% and 15.1% of the fund is allocated for repayment of borrowings and working capital requirements respectively.

As at 23 May 2019, ISTONE has an unbilled purchase orders of RM25.79m, providing near term earnings visibility over the next 2 to 5 months. Gearing ratio is set to improve from 0.6x to near zero post listing. Given ISTONE’s expertise on customised automation machine from various industries, we expect earnings growth to be driven by higher adoption of manufacturing automation tapping on government’s initiative of Industry 4.0.

Source: Rakuten Research - 17 Jul 2019