Case Study of Foundpac Group Berhad (5277)

By Stella Goh – Market Data Analyst | 19 February 2020  

Overview

Foundpac Group Berhad (FPGROUP) is a Malaysia-based investment holding company founded in 2015 and headquartered in Bayan Lepas, Penang. FPGROUP is primarily involved as an import-export company that has made a significant impact in the manufacturing and engineering industry.

FPGROUP was listed on Bursa Malaysia’s Main Market on 29 December 2016. FPGROUP nurtures alliances with a reputable network of vendors and contractors in order to provide an unequalled standard of excellence. The group has acquired accreditation with ISO 9001 as proof of their quality and commitment to excellence.

Business Model

FPGROUP is primarily involved in the design, development, manufacturing, marketing and sale of precision engineering products such as stiffeners, integrated circuit (IC) test sockets, hand lids, and related accessories as well as manufacturing and sale of laser stencils. Examples are final test stiffeners, probe and card stiffeners, accessories for stiffeners, high pin court sockets, fine pitch sockets, high power or high frequency sockets, tri-temp test sockets, module test sockets and toggle clamp hand lids.

FPGROUP’s customers are primarily large multinational semiconductor manufacturers, outsourced semiconductor assembly and test companies (OSATs) and printed circuit board (PCB) design houses as well as fables semiconductor companies. All FPGROUP’s products are distributed within Malaysia as well as exported to countries including Singapore, China, Hong Kong, Taiwan, France and the UK.

Financial Review

FPGROUP has achieved a revenue growth of 26.49% from RM35.534 million in FY2018 to RM44.946 million in FY2019. Based on the past 5 years CAGR basis, the gross profit growth was 8.27%.

The increase in revenue from the Asia market was mainly contributed by existing and new customers in China, Hong Kong and Taiwan for both precision engineering and laser stencil segments. While the increase in revenue contributions from North America and Europe markets were mainly contributed by existing customers in North America and Germany for the precision engineering segment. (Source: Annual Report 2019)

FPGROUP has recorded a RM6.073 million increase in gross profit, translating to a growth of 35.76% from RM16.983 million in FY2018 to RM23.056 million in FY2019. Based on 5 years CAGR basis, the group’s gross profit has grown 12.71%. The increase in gross profit was due to the hike in revenue generated by precision engineering segments, namely stiffeners and related accessories.

Based on Annual Report 2019, the precision engineering segment recorded a surge in revenue from Asia, North America and Europe markets by RM2.761 million, RM2.223 million and RM2.088 million respectively as compared to FY2018. Besides, the laser stencil segment also generated a hike in revenue from other Asian markets by RM1.947 million.

The Profit After Tax (PAT) of FPGROUP rose 58.08% from RM8.011 million in FY2018 to RM12.664 million in FY2019. On a CAGR basis, the Profit After Tax (PAT) grew by 6.57% which was in line with the growth in revenue and gross profit.

Cash Flow Statement

The net cash from operating activities has provided a positive cash flow of RM9.650 million in FY2019 as compared to RM5.406 million in the previous year indicating that the company is healthy and has enough cash to be used for business expansion.

The net cash from investing activities in FY2019 (-RM5.208 million) was mainly due to the purchase of Property, Plant and Equipment (PPE) of RM6.758 million. The negative cash flow indicates that the firm is investing more in its business for growth. (Source: Annual Report 2019).

The net cash from financing activities in FY2019 (-RM5.175 million) was mainly due to the dividend paid to shareholders of the company (RM5.186 million) and dividend paid to non-controlling interests (RM262,500).

Is the company able to pay back its liabilities?

Based on liquidity ratio calculation, FPGROUP has a current ratio of 12.86 times in FY2019 indicating that the company does not face any liquidity issues as it is capable of paying back its liabilities if any unforeseeable circumstances occur. FPGROUP is able to do so by using current assets such as inventories, receivables, prepayments, current tax assets, cash and cash equivalents amounting to RM53.491 million. However, this may also indicate that the company is not efficiently using its current assets or its short-term financing facilities.

Prospect and Challenges

According to the group Chief Executive Officer Ong Cheng Hoon, FPGROUP plans to produce parts for the automotive industry next year and it has installed a new production line to manufacture the critical automotive parts. The group was in the process of applying for the IATF 16949 certification which will qualify it as a first and second tier producer of critical automotive parts. The certification is expected in 1H 2020 and commencement of commercial operations in 2H 2020. The negotiations as a key supplier of critical automotive components with European and Asian carmakers are expected to be concluded in FY2020. (Source: StarBiz, 16 Dec 2019).

According to The Star Business, FPGROUP expects its first-half performance for the financial year ending 30 June 2020 to improve by double digit percentages, driven by the implementation of 5G infrastructure and transmission towers. The group Chief Executive Officers Ong Choon Heng told StarBiz that for the first half of 2020, more than RM25 million worth of test sockets, stiffeners and laser stencils would be shipped to semiconductor test equipment customers in United States, Europe and China compared to about RM21 million achieved in the corresponding period of the preceding year. (Source: StarBiz, 23 Sep 2019).

The test sockets and stiffeners are attached to semiconductor test equipment to check integrated circuits and printed circuits boards used in a wide range of 5G hardware, electronic home appliances, consumer electronics and semiconductor parts. According to Ong, the rollout of 5G technology is expected to hit US$2.7 trillion by the end of FY2020. (Source: StarBiz, 23 Sep 2019).

FPGROUP’s stencils enable the electronic manufacturing services (EMS) companies to manufacture at a lower cost. Moving forward, the group will continue to focus on the high-mix and low-volume product business model. The group’s strategy is to compete with the other test socket and stiffener manufacturers in terms of quality so that they can price their products higher to generate better margins. (Source: StarBiz, 23 Sep 2019).

Rating System

Return on Equity (ROE) = Average

Revenue [5 years CAGR] = Average

Net Earnings [5 years CAGR] = Average

Basic Earnings per Share (EPS) [5 years CAGR] = Average

Interest Coverage = NIL

*Interest Coverage is NIL because there is no interest income incurred. (Source: Annual Report 2019)

Insight

Based on the calculation of Discounted Earnings Model, FPGROUP has an intrinsic value of RM1.495. The current share price of FPGROUP is RM0.95 which makes it an undervalued stock (as at 18 Feb 2020). FPGROUP has a beta of 1.784 (500 days) indicating that the company is more volatile than the current market. Investors may face higher risk. Based on the computation of Compound Annual Growth Rate (CAGR), FPGROUP has an expected market return of 5.22%.

In conclusion, FPGROUP has achieved an outstanding performance in FY2019 with its highest revenue and gross profit over the past 5 years. FPGROUP’s prospect remains bright as the rollout of 5G in China, Europe and the United States is expected to generate demand for integrated circuits for use in the hardware of 5G transmission towers. The company is expected to perform well in the future as the Internet of Things (IoTs) needs a lot of high-end equipment to test and automate hence creating a strong demand for semiconductor test equipment.

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