• MYR0.93 FV based on 17x FY24F (Mar) P/E. Supported by the strong demand arising from US-China tensions and sticky clientele, YBS International’s new manufacturing plant is set to capture a larger market share from its existing and new multinational corporation (MNC) clients. Efforts to move up the value chain by producing higher value-added products and economies of scale should contribute to margin expansion. Coupled with strong growth potential (3-year earnings CAGR of 49.8%), we think its 12x FY24F P/E is attractive vs the sector average of 27x.

• Engineering strength secures strong customer base. YBS’ precision machining and stamping unit (60-65% and 50% of group revenue and profit) serves global MNCs in the telecommunications, electrical & electronics (E&E), aerospace, and automotive industries. Its operations are supported by a large team of 100 engineers. Its ability to meet requirements in small and lightweight parts with precise tolerances is a key differentiator. It has also established >10 years of business relationships with key customers.

• Beneficiary of the US-China trade diversion. YBS has been in the sweet spot of the US-China trade war since 2019. Various customers, especially its telecommunications MNC clients, are sourcing for engineering support services in Malaysia to diversify at least 30% of supplies out of China to mitigate the growing risks. Hence, the newly built plant expansion at Penang Science Park is timely to grab the opportunities. The group is in talks with existing and new customers to capture extra market share by having some projects at its Penang and Vietnam plants. With a manufacturing presence in three locales, it is able to assure customers of its robust business continuity plan should there be supply constraints at any one of its sites.

• Aggressive expansion plan to capture growth opportunities. Its 10.03 acre Penang Science Park factory will cater for surface mount technology (SMT) line and printed circuit board assembly (PCBA) – it intends to become a one-stop contract manufacturer, machining and cable assembly, paper board packaging, as well as moulding and assembly provider. YBS has shifted a few machines from its Johor plants to Penang Science Park Plant and started mass production on precision machining and paper packaging. The group is striving to ramp up the utilisation rate of its current manufacturing lines to 80% from 50% currently. It is also adding another 600 workers in the next 2-3 years to support expansion and new projects.

• Earnings forecasts and valuation. With its additional production capacity and new customer orders, we are forecasting a 3-year earnings CAGR of 49.8%. We ascribe a 17x FY24F P/E to YBS – a 15% discount from the 20x P/Es we ascribe to other precision machining peers like Dufu Technology (DUFU MK, NR) and Coraza Integrated Technology (CORAZA MK, BUY, TP: MYR0.93) due to its smaller market cap. Key risks: Shortages of manpower and key components, dependence on a few major customers, as well as political, economic and regulatory risks.

Source: RHB Research - 8 Nov 2022