• MYR0.34 FV based on 16x FY25F P/E. 3REN intends to raise MYR30.8m fromits IPO, mainly to fund business expansion plans and R&D expenditure. Our 16xP/E was obtained after benchmarking against comparable players in the productengineering services, IC assembly and test engineering support services, anddigitalised solutions and automated equipment. Its 3-year earnings CAGR of11.5% is based on the anticipated recovery of the semiconductor industry.

• 3REN mainly serves customers in the semiconductor and electronics industries,with its main customer being the Intel’s group of companies. It operates inMalaysia and its four business pillars are product engineering services (PES),engineering support services (ESS), digitalised solution and automatedequipment. 30-40% of the group revenue is non-recurring as it is primarilyproject-based and tends to be lumpy in nature. Meanwhile, PES and ESS revenuemodels are contract based with a 1-3-year period.

• Expansion plans. 3REN has earmarked MYR7.2m from its IPO proceeds toestablish dedicated Delivery Centres to support the growth of its productengineering services segment, transitioning project work from customers’premises to these centres. Also, this will improve cost effectiveness byconsolidating operations, optimising resource allocation, and streamliningprocesses. MYR5.1m is allocated for R&D expenditure, including the setting upof an innovation centre at its Tangkas 9 plant, hiring experts in artificialintelligence (AI), data science, cloud engineering, and acquiring essential ITinfrastructure.

• Forecasts. Supported by an outstanding orderbook of MYR30.4m, we forecast a3-year revenue and core earnings CAGR of 10.4% and 11.5%, with core earningsmargins sustaining between 12-13%. More outsourcing activities could be oneof the growth drivers as many of its customers are looking for costrationalisation and potential new projects, especially in the PES and SmartFactory segments. Additionally, Malaysia's automated manufacturing anddigitalised solutions industry is expected to grow at a 13.1% CAGR toMYR17.4bn, with the global market growing at 12.7% to USD448.6bn by 2026.3REN’s establishment of dedicated Delivery Centres, as well as continued R&Defforts position the company to capitalise on these trends.

• Valuation. We arrive at a FV of MYR0.34, based on 16x FY25F P/E. While thereis no like-to-like peer, our target P/E is benchmarked against comparable playersinvolved in PES, IC assembly and test, ESS, as well as digitalised solutions andautomated equipment. The 20% discount to peers reflects 3REN’s smallermarket capitalisation, concentrated customer exposure and scalability.Nonetheless, its diversified business segments will likely form a counterbalanceshould any of the sub-segment(s) face headwinds. We believe its strongpositioning in the key segment and customer base in the semiconductor and E&Esectors are expected to drive future growth and profitability.

• Key risks include dependence on key personnel, major customers, terminationof secured orders, and the lack of long-term contracts, making the group relianton its ability to continuously secure new purchase orders

Source: RHB Securities Research - 23 Oct 2024