KUALA LUMPUR (Aug 7): Cape EMS Bhd's (KL:CEB) share price has fallen like a rock, plunging from RM1.01 in mid-July to an all-time low of 40.5 sen on Aug 6.

Some quarters blamed it on the share sales by the company's managing director and chief executive officer (CEO) Christina Tee Kim Chin. However, the stock was already spiralling down fast even before Tee started selling her shares.

Last week, Tee, the single largest shareholder of the company, sold a total of 3.89 million shares.

This compares with a total of 112.74 million shares that was loaded off last Tuesday (Aug 6) - the biggest chunk she sold on a single day. These shares were pledged to brokers, according to company filings to Bursa Malaysia. The sale fetched her roughly RM53.56 million.

Tee's share sales were likely due to margin calls, considering the steep drop in Cape EMS' share price in the last two weeks. Other shareholders, too, received margin calls that triggered forced selling.

When contacted, several institutional investors pointed out that there is growing concern over the future prospects of the company, which made its debut on the Main Market in March 2023 with an initial public offering (IPO) price of 90 sen per share.

They commented that Cape EMS' acquisition of US-based iConn in January, which specialises in virtual manufacturing services such as design for manufacturing, engineering, and sourcing, complements, is questionable.

Cape EMS paid US$16.5 million (approximately RM76.6 million) to take over iConn. The deal came with a profit guarantee of US$8 million for three years between 2024 and 2026.

However, Cape EMS' note for its quarter ended March 31 financial results (1QFY2024), showed that it had booked goodwill on acquisition amounting to RM79.45 million for the takeover.

In 1QFY2024, Cape EMS achieved 58% year-on-year (y-o-y) growth in net profit to RM13.4 million, against RM8.5 million a year ago, on improved performance in both industrial and consumer segments.

Quarterly revenue grew 12.4% y-o-y to a record high of RM154.48 million from RM137.35 million, driven by higher demand for its products, particularly in wireless communication equipment, electronic cigarettes, and light electric vehicles.

Still, the jump in earnings was not impressive enough compared with the expectations of some fund managers and analysts. Furthermore, the confidence in the company’s management was shaken given the goodwill on acquisition.

Prior to this, Cape EMS had already experienced its first steep selloff in February, which dragged its share price to below its IPO price less than a year after its listing.

This was due to weaker-than-expected results at that time, with RM5.5 million net profit in the fourth quarter ended Dec 31, 2023 (4QFY2023), despite revenue climbing to a high of RM147.7 million.

FY2023 net profit came higher at RM46.64 million, against RM38.42 million the year before. Revenue grew to RM542.84 million from RM437.95 million in FY2022.

The growth nonetheless fell short of expectation, with core net profit coming in 12% lower than consensus estimate.  

It is worth noting that Cape EMS did a private placement of 69 million shares to raise gross proceeds of RM73.83 million, at an issue price of RM1.07 apiece. The fresh capital raised was meant for the acquisition of iConn.

For this fresh round of sell-down that started in mid-July, it was understood that some fund managers realised that the company’s management gave different guidance on earnings performance as they compared notes among the peers. This did not augur well on the management’s credibility.

The Edge has contacted Cape EMS for comment to verify the above matters.

Despite the sharp fall in share price in the last two weeks, investment analysts tracking the stock have yet to revise their recommendations.

All four analysts have a consensus "buy" call on Cape EMS with an average target price of RM1.52, based on an annual profit forecast of RM73.6 million for FY2024, according to Bloomberg data.

Since July 16, the counter has seen 1.43 billion shares exchange hands, against its share capital of 992 million shares. Daily trading volume on Wednesday alone jumped to a record high of 736.24 million shares, or 74.2% of its share base.
 

https://www.theedgemarkets.com/node/722061