KUALA LUMPUR (Jan 27): SGX-Mainboard listed UMS Holdings Ltd is buying a 10% stake in Malaysian aerospace metallic component manufacturer All Star Fortress Sdn Bhd (ASF) for RM145,000 in cash.

In a statement today, it was revealed that UMS, which is a strategic integration partner in manufacturing and engineering for front-end semiconductor equipment manufacturers, had entered into a definitive shareholders agreement with ASF.

This latest investment is part of UMS's strategy to diversify beyond its traditional semiconductor business segment in order to achieve an alternative revenue source as well as to allow the group to venture into a high potential growth sector within the aerospace industry.

Earlier, both parties had inked a memorandum of understanding with respect to UMS's investment into ASF as well as their collaboration to grow ASF's aerospace metallic parts manufacturing business.

According to its website, Melaka-based ASF's directors are namely Datuk Rosdi Mahmud, Jackson Lee and Bryan Tang.

Under the shareholders agreement, UMS's wholly owned subsidiary Ultimate Machining Solutions (M) Sdn Bhd will subscribe for approximately 10% of ASF's enlarged share capital at par value, for a total consideration of RM145,000 in cash. The consideration will be funded from internal sources of UMS.

The agreement also stipulated that Ultimate Machining will also make available to ASF up to US$7.5 million (RM31.86 million), of which US$4.95 million will be used to purchase the necessary equipment and machines for its manufacturing of metallic components, US$1.7 million will be used to build a special process line while US$850,000 will be used for working capital purposes.

"In connection with the proposed funding by UMS, UMS and ASF have entered into a loan agreement pursuant to which UMS will loan to ASF up to US$7.5 million.

"The loan is interest-bearing at interest rates between 3% per annum [and] 5% per annum. In addition, the loan is secured by assets of ASF, certain assets pledged by the individual shareholders of ASF and also personal guarantee of individual shareholders of ASF," said UMS.

Further, pursuant to an option subscription agreement entered into between Ultimate Machining and ASF, the group has been granted the option to subscribe for additional ordinary shares in the capital of ASF by converting the balance loan amount given to the ASF.

The option can be exercised at any point in time after one year, up to a maximum of 20 years subject to the revenue of ASF exceeding RM2 million.

The equity percentage for the option shares will depend largely on the accumulated profits of the company from Jan 1, 2016 up to the exercise date; the accumulated profits generated are inversely related to the amount of option shares.

On top of providing financial support to ASF, the group will also rent out part of its unutilised manufacturing facility to ASF on a commercial basis.

"Moreover, ASF will be compensating UMS for the costs and expenses incurred in providing the fixtures, fittings and basic infrastructures in UMS's Penang premises. As such, the group does not expect material capital expenditure in relation to its investment in ASF," it said.

UMS chief executive officer Andy Luong said that the group is excited about the prospects of the investment.

"In the short term, we foresee a slight boost to profitability as we can expect some interest income and rental revenue from this collaboration.

"Over the longer period, we intend to work closely with ASF to expand their footprint and become a sizeable player within the aerospace industry. The group expects it will become the major shareholder of ASF in the years to come," he said.

The group added that with the increasing trend of international aerospace players outsourcing more work as well as the Malaysian government's efforts to further develop the local aerospace manufacturing industry, the group believes that coupled with its support, the collaboration is in a good position to capture these strong growth potentials.

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