Cape EMS Berhad (CEB - 5311), a distinguished electronic manufacturing services (EMS) provider, specializes in the production and delivery of electronic components and devices. FY24 holds exciting prospects for CEB, for its (i) wireless communication business to support 5G growth and data centers; (ii) electric vehicle (EV) segments; and (iii) electronic cigarettes. We anticipate CEB to report net earnings of RM68.2m and RM85.8m for FY24 and FY25 respectively. BUY with a TP of RM1.37 based on 20x PER (discounted to the industry EMS PER of 25x due to its smaller market cap) over FY24 EPS. The company’s financial leverage is manageable, with a net gearing of 0.4x as of December 31, 2023, and an interest coverage ratio of >7x.

One of CEB’s customers, Mimosa Network, has successfully expanded into new markets and customer segments. This achievement reinforces Mimosa's ongoing commitment to channelling higher orders to CEB within the wireless communication segment. We estimate that CAPE is on track to fulfil our FY24 order forecast assumption, with delivery anticipated over the next 6 months.

The acquisition of iConn Inc by CEB, set to be completed by 1QFY24, aims to integrate design and engineering capabilities, especially in the EV segment. This strategic move is expected to enhance and diversify the range of services in its electronics manufacturing services segment. CEB has concluded the pilot run for its customers and is currently in the process of obtaining qualification for its production line, with mass production scheduled for 2QFY24.

CEB's recent joint venture with Vectrix (with CEB holding an effective 60% equity stake) for the manufacturing and design of battery swap stations for e-bikes is progressing on schedule, with production set to start in 2Q24.

CEB has recently increased the capacity for its e-cigarettes designed for customer A in response to increasing demand by completing subline installations on existing machines and is poised to accommodate higher volumes from its customers in the months ahead.

The company has expanded its Tebrau 6 Factory, measuring 100,641 sq ft. Ten new aluminium die-cast production lines commenced operations in December 2023. Meanwhile, machinery in progress includes nine units of robotic pick and spray equipment, two units of CNC lathe machines, and three units of rotary screw air compressors.

CEB is also planning to build a warehouse at Senai, measuring 166,917 sq ft., to house finished goods for EMS operations and, thus, free up storage floor space in Senai 227 Factory for the expansion of EMS operations.

Source: Rakuten Research - 11 Mar 2024

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