This article first appeared in The Edge Malaysia Weekly on August 21, 2023 - August 27, 2023

A machinist without the benefit of higher education, Keoh Beng Huat has certainly come a long way. Today he is the founder of a multi-billion ringgit listed engineering firm that commands better profit margins than most of its competitors.

The managing director of SFP Tech Holdings Bhd remains a humble man, reluctant to talk about himself and preferring to let his company’s success speak for itself.

He is eager, however, to address declining margins. SFP’s profit margins may have declined over the past three years, but Keoh maintains that they remain largely decent owing to the Penang-based technology firm’s ability to undertake more complex, high precision and high-mix manufacturing jobs with higher margins.

From 56.7% in the financial year ended Dec 31, 2020 (FY2020), its gross margin slipped to 53.8% in FY2021 and to a further 50.1% in FY2022. At the same time, net margin dipped from 42.9% in FY2020 to 38.5% in FY2021 and 37.8% in FY2022.

Keoh acknowledges that the net margin had edged lower to 29.2% in the first half of the year ended June 30 (1HFY2023) because of higher contribution from its mechanical assembly segment, which typically carries lower margins compared to its other business segments.

Nevertheless, he says familiarity of new orders, as well as potential cross-selling opportunities through computer numerical control (CNC) machining and sheet metal fabrication are key determinants of margin recovery in the upcoming quarters.

“We are targeting a group overall net margin of between 30% and 40% once the production scales up and our new plant’s utilisation rate increases. We will also improve our technological capabilities to achieve higher margins,” he tells The Edge in an interview.

Headquartered in Penang Science Park at Kawasan Perindustrian Bukit Minyak, SFP has two main business segments — engineering supporting services (ESS) and automated equipment solutions (AES).

The ESS division — in which SFP provides sheet metal fabrication, CNC machining and mechanical assembly services — is the bread and butter of the group, contributing close to 85% of its top line in FY2022.

Under the smaller AES division, the group provides factory automated equipment solutions, including vision inspection system, robotic handling equipment and assembly system, which complement its ESS businesses.

“We are focusing on securing more new customers and expanding our product range and value-added services via [the] integration of ESS and AES to allow cross-selling opportunities, which enable the group to record better margins on higher utilisation of equipment,” says Keoh.

SFP has just completed its third manufacturing plant with a factory floor space of 319,200 sq ft to house new equipment for capacity expansion in both the ESS and AES segments.

As a result, the group’s combined manufacturing floor space has more than tripled, from 147,400 sq ft previously to a total of 466,600 sq ft currently across its three factories.

SFP has a diversified client base of over 50 active customers, who are mainly original equipment manufacturers (OEMs) and electronics manufacturing services (EMS) providers, in end-application industries such as semiconductor, solar photovoltaic, electrical and electronics (E&E), automotive, industrial and healthcare.

Even during the Covid-19 pandemic, SFP’s earnings increased from RM17.6 million in FY2020 to RM19.4 million in FY2021, before growing further to RM32.4 million in FY2022. In 1HFY2023, the company generated profit of RM20.7 million on revenue of RM71.05 million.

As at June 30, the company’s net cash position stood at RM0.7 million, giving it room to gear up if needed.

Keoh remains optimistic of SFP’s future prospects as the group plans to leverage its competitive advantage, while its expansion plans will contribute positively to its financial performance in the coming years.

“Our competitive edge is that we have a huge fleet of multi-axis, multi-geometry CNC machinery. We could offer wide scope engineering services and factory automation equipment services all under one roof.

“We have the ready capacity to take on high-mix low-volume and high-mix high-volume requirements and provide quick and efficient delivery to customers,” he stresses.

As the founder of the company, Keoh points out that he is very familiar with machining processes and understands what clients want. “I know ways to make production faster and more efficient, so that we can achieve higher yield with less wastage while optimising the most efficient methods for customers to achieve their targeted products,” he says.

“Our long-term target will be to maintain a 25%-26% revenue CAGR (compound annual growth rate). In that way, the company will see its revenue grow by 10-fold in 10 years,” he remarks, adding that key growth factors include capacity expansion via new plants, machinery and workforce.

Keoh reiterates that SFP is synergising the service offerings between the group’s two key segments, ESS and AES, to provide one-stop integrated solutions to its customers.

“Business has been strong as we are on track to achieve a revenue target of RM150 million to RM200 million in FY2023, as compared with only RM41.1 million back in FY2020,” he says.

Keoh, 55, is the single largest shareholder of SFP with a 67.6% stake.

After graduating from Sekolah Menengah Kebangsaan Jelutong in 1983, he began his career in 1984 with Low Kim Teow Engineering Sdn Bhd as a machinist and was responsible for operating machinery involved in the manufacturing of precision metal parts.

In 1991, Keoh started his own business by establishing Stampford Engineering, a partnership which was involved in the provision of grinding and metal works.

In October 2012, he co-founded Stampford Technology Sdn Bhd with his wife Chye Choon Fong. The company was later renamed SFP Technology Sdn Bhd and is now one of the group’s main operating subsidiaries.

SFP was listed on the ACE Market of Bursa Malaysia in June 2022. Since its listing, its share price has increased by over 10 times to settle at RM1.05 last Wednesday — up from its post-bonus issue adjusted initial public offering (IPO) price of 10 sen — giving the company a market capitalisation of RM2.52 billion.

Commenting on its impressive share price performance, Keoh says he appreciates the support from investors. However, from a management perspective, his target is to “focus on improving the business and operations of the company” and “let the market freely determine the intrinsic value of the company”.

SFP shares are currently trading at a historical price-earnings ratio (PER) of 67 times. In comparison, UWC Bhd is trading at a PER of 45 times and Coraza Integrated Technology Bhd at 20 times (see table).

Batu Kawan-based UWC provides precision sheet metal fabrication and value-added assembly services, while Nibong Tebal-based Coraza is an integrated ESS provider involved in sheet metal fabrication, precision machining and sub-modular assembly.

On the one-year anniversary of its listing, SFP in June this year completed a two-for-one bonus issue exercise. As a result, its share base was expanded from 800 million shares to 2.4 billion shares, while its IPO price was adjusted from 30 sen apiece to 10 sen per share.

Local institutional investors collectively own about 13% to 15% of the company. They include Great Eastern Life Assurance (M) Bhd, Amanahraya Trustees Bhd’s funds, KAF funds, Areca equityTrust Fund and Gibraltar BSN Aggressive Fund.

Keoh reveals that SFP has met the criteria to qualify and transfer to the Main Market, and that the company will submit an application to the relevant authorities “when the time is right”.

“We hope to continuously focus on improving our businesses and operations and get the support from both institutional and retail investors to grow long term with us,” he says.

Keoh highlights that since its listing, SFP has seen improvements in the company’s profile and strong customer interest, as it received more approved vendor list (AVL) inclusions, indicating more new potential business for the group.

He reveals that SFP has “dramatically increased” its client list of multinational corporations (MNCs), both local and overseas, since listing. At the same time, the group continues to pursue a strategy of engaging new potential MNC customers directly.

Currently, the group’s principal markets are Malaysia, Singapore and the US, while its other markets include India, the Philippines and South Korea. “We are expanding our target markets globally to new customers in North America, Western Europe, India and other Asia-Pacific countries, including China,” says Keoh.

“As part of the group’s business strategy, we will capitalise on growth opportunities in the high value-add mechanical assembly segment and envisage to further grow this business segment with sporadic large project-based business opportunities.” 

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