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KUALA LUMPUR (May 16): Edelteq Holdings Bhd, which is scheduled to be listed on the ACE Market of Bursa Malaysia on May 30, has been ascribed a fair value of 33 sen by TA Securities Research — 37.5% higher than its initial public offering (IPO) price of 24 sen.  

Based on its IPO price, the counter is priced at a trailing price-earnings (P/E) of 17.7 times core earnings per share (EPS) for calendar year 2022 (CY2022). It will have a market capitalisation of RM127.81 million upon listing.  

“As we assign a target P/E of 20 times its CY2024 EPS, we derive a fair value of 33 sen/share. This takes into account the group’s proven track record and expansion plans, which will allow it to capitalise on the next semiconductor upcycle.  

“Additionally, we have also taken into consideration the group’s experienced management team, established clientele, healthy double-digit margins, and robust balance sheet,” said the research house in a note on Tuesday (May 16). 

The group, which is principally involved in the provision of engineering support for integrated circuit assembly and test processes in the semiconductor industry, expects to raise RM24 million from its IPO, where 42.7% of gross proceeds will be used for the repayment of bank borrowings, followed by 15.3% to construct a Batu Kawan factory, and 14.1% for working capital.  

The research house noted that Edelteq had a net cash position of RM3 million with cash and bank balances of RM6.2 million and borrowings of RM3.2 million as at end-December 2022.  

On a pro forma basis, fresh proceeds of RM24 million from the IPO are expected to strengthen the group’s net cash position to RM27 million, it noted. 

Looking ahead, TA Securities forecasts Edelteq’s revenue to increase at a three-year compound annual growth rate (CAGR) of 12.5% to RM34.7 million for the financial year ending Dec 31, 2025 (FY2025), and its core net profit to grow at a three-year CAGR of 14.6% to RM10.9 million for the same year.

“This is premised on our FY2023/FY2024/FY2025 sales growth assumptions of - 5%/+25%/+20%, and corresponding earnings growth [forecasts] of -4.5%/+27.6%/+23.5%,” said the research house.

Sales to decline in FY2023, before rebounding in FY2024 and FY2025

In tandem with the global semiconductor sector's ongoing downcycle, it is expected that the group’s sales will decline momentarily in FY2023. The weak trajectory is a consequence of weakening demand for electronics (following pent-up demand during the Covid-19 pandemic), coupled with a slowing economy and inflationary pressures.  

“That said, supporting near-term visibility, as at April 10, Edelteq had unbilled purchase orders of RM7.1 million, which are expected to be fulfilled during the year,” said TA Securities.  

Having said that, the research house expects the group's sales to rebound in FY2024 and FY2025, amid the depletion of inventory levels and demand recovery backed by catalysts from secular trends including 5G, artificial intelligence, high-performance computing, the Internet of Things and vehicle electrification, among others.  

“We [also] expect growth to be facilitated by additional capacity from the group’s upcoming plant in Batu Kawan, which is expected to commence operations in March 2024,” it added.  

Edelteq has a fixed dividend policy, with a target dividend payout ratio of up to 20% of its profit after tax. 

“Based on an assumed dividend payout of 20% across FY2023/FY2024/FY2025, we project forward yields of 0.8%/1.4%/1.7%,” the research house added.  

Edited ByIsabelle Francis
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