Listing on the ACE Market today, Volcano Bhd (VOLCANO) is a leading manufacturer of nameplates and plastics moulded parts with a strong portfolio of international and multinational corporation customers, predominantly in electrical and electronics (E&E) as well as automotive industry. Recommend BUY with a target price of RM0.40 based on 15.8x PER FY21 as per the average valuation of FBM Small Cap Index and Bursa Industrial Products & Services Index.

Founded in 1999, VOLCANO is principally involved in the manufacturing of parts and components, namely nameplates and plastic injection moulded parts, used in the E&E and automotive industries. It operates two factories located in Penang and Thailand with a total build-up area of 151,220 sq ft mainly serving customers located in Singapore and Thailand with 44% contribution of revenue in FY2020 each. Volcano has a strong portfolio of international and MNC customers, with high percentage of repeat customers (156 out of 189). 90% of VOLCANO’s clients are MNC players namely Donaldson Thailand, Fisher & Paykel Thailand, Beko Thai, Hewlett-Packard, Honda and Mazda. Over 80% of the sales are derived from E&E industry and the group have a healthy long-term relationship with main clients.

Bulk of the IPO proceeds is earmarked for purchase of machineries and equipment. VOLCANO’s current laser cutting production capacity stood at 32.3m units per year and laser cutting machines’ utilisation rate is high at 88.7% in FY20. With the addition of 6 units of laser cutting machines via IPO proceeds on top of the 4 machines purchased using internal funds, laser cutting production capacity will jump to 55.5m units per year, implying a 71.4% expansion. Meanwhile, RM2m will be allocated to purchase 5 units of pick and paste machines to enhance the automation in manufacturing process. With additional capacity of its nameplate manufacturing process, this should enable VOLCANO to fulfil high complexity orders with lower defect rate.

Meanwhile, the group intends to expand plastics injection moulded parts manufacturing business in Rayong, Thailand via factory builtup area expansion of 10,086 sq ft and the acquisition of 5 injection machines. This is expected to increase annual capacity by 15.7% and projected to be fully operational by 2H2024.

The group has a formal dividend policy of at least 30%, translating to a projected yield of 2.2% and 2.6% in FY2021 and FY2022, respectively. Balance sheet is healthy prior listing with zero borrowings and net cash position of RM12.9m. Post listing, we expect net cash position to be strengthen to RM20.3m.

Source: Rakuten Research - 6 Apr 2021