Investment Merits

• Structural growth trend for automotive electronic components
• New project win for its export segment
• Growth opportunities in the local EV market

Company Profile

MCE Holdings (MCE) is a leading original equipment manufacturer (OEM) and electronics manufacturing services (EMS) provider specialising in the full spectrum of design, manufacture, and supply of automotive electronics and mechatronic parts for the Malaysian and regional markets. It currently has two operational facilities in Johor and Port Klang, Selangor, employing over 500 full-time workers.

Highlights

EMS and tier-1 automotive supplier. The demand for electronic parts and automobile components like switches, sensors, monitoring and safety systems, infotainment, onboard computers and such are also set to grow exponentially in the next decade, driven by technological advancements and improved safety features. There are also opportunities in the localisation programmed by both the local and foreign car manufacturers in Malaysia and within the ASEAN region. MCE, which has experience in supplying mechatronic and electronic parts to local automotive players over the years, stands to benefit greatly from these opportunities as well as initiatives under the National Automotive Policy 2020 (NAP 2020). MCE aims to double the existing floor space at its new plant in Serendah (built-up area of 117k sq ft) to accommodate new projects and support its automotive customers in the proximity.

Next growth engine: EV. The expected launch of local CKD EV by both national carmakers in 2025 could be another catalyst, and an opportunity for MCE to grow its product range and tap into the new car segment. Its capabilities, strong track record and ties with both national marques could grant it an edge when both marques select suppliers. Recall that one of the NAP 2020’s objectives is to develop a next-generation vehicle (NxGV) technology ecosystem to make Malaysia a regional hub for NxGV production. MCE has ventured into the EV space with its Manufacture License and World Manufacturer Identifier (WMI) code to assemble emotorcycles in Malaysia. It is now producing low-frequency (LF) antennas for e-motorcycles’ smart key systems in Indonesia.

Growing beyond ASEAN. We understand that MCE is vying for projects in North America via another tier-1 supplier – which could be the major growth driver into 2HFY25 (Jul) and beyond. Besides, MCE is growing its export market, especially in ASEAN, via one of its growing Japanese customers. As TIV continues to rise – given the advent of the middleincome segment in ASEAN – an increase in MCE’s sales volumes and project win should be a boon for the company.

Company Report Card

Results highlights. Following its turnaround in FY22, MCE’s numbers grew steadily into 1HFY24, with net profit up by 21% to MYR9.4m on the back of higher revenue and improved margins – which, in turn, stemmed from better economies of scale.

Balance sheet/cash flow. As of 1HFY24, net gearing was healthy at 0.1x, but we expect this to inch up following the beginning of construction of a new plant in Serendah. ROE is hovering at the mid-teens in FY24 as the group continues to grow and its margins improve.

Dividends. The group declared a 2.75 sen DPS in FY23, with a yield of 1.4%. There is room for more dividend payouts in FY24, in view of the improved profitability and proceeds of MYR44m from its recent land sale. MCE has declared an interim DPS of 1.5sen for the current financial year.

Management. Dr Goh Kar Chun has been the Managing Director since 2016. Prior to that, he was an executive director since 2008, overseeing the group’s business development, marketing and sales, production, engineering and quality assurance functions. He is supported by: i) Executive Director/CFO Anne Goh, who is in charge of the finance, human resources, administrative and IT departments, and ii) COO Lim Chern Tin.

Investment Case

Growing its client base and product. The existing and new contracts to supply electronic and mechatronic components and parts for various car models for Perodua and Proton should form the base for MCE to grow from strength to strength. The expansion of its capabilities to become a modular supplier and new project wins should propel earnings to new highs. Potential contracts related to local EV models and the new plant expansion are among its growth drivers into FY25 and beyond.

Fair value. Pegged to target 13-15x P/Es on FY25-26F earnings, MCE’s FV ranges between MYR2.35 and MYR3.19. The target P/E is still below that of peers in the automotive lighting business and EMS players. We believe the company’s steady earnings delivery, structural growth in automotive electronic components, and exposure to the EV space as well as a growing export model will continue to garner investor interest. Besides, earnings in the automotive industry are generally more defensive thanks to the relatively lower volatility in demand and longevity of the vehicle parts (5-10 years).

Key risks include escalation of input costs, deceleration of orders, weaker-than-expected total production volumes and the loss of key customers.

Source: RHB Securities Research - 15 May 2024