This article first appeared in The Edge Malaysia Weekly on July 15, 2024 - July 21, 2024

SIX years after it took over its associate Supercomal Medical Products Sdn Bhd (SMP), Kedah-based cable and device manufacturer Supercomnet Technologies Bhd (KL:SCOMNET) is ready to hit the acquisition trail again.

According to executive director Lim Eng Chuan, the group is close to acquiring a minority stake in a Chinese company involved in the development of lenses for medical applications for some RM10 million. The new partnership will enhance Scomnet’s existing product portfolio, which includes cables for medical devices.

“This company already has a factory manufacturing medical devices here and has a major customer in the US. Previously, they were in China but moved their manufacturing operations to Malaysia (under the China Plus One strategy) and they invited Scomnet to be a strategic partner. We see this as a good opportunity for Scomnet, since the company is already using some medical cables from Scomnet,” he tells The Edge in a virtual interview from Scomnet’s headquarters in Sungai Petani, Kedah. Lim is a substantial shareholder with a 6.67% holding as at March 29, 2024.

The group expects the deal to close “in the near future”.

But Scomnet is not resting on its laurels. It is on the lookout for more acquisitions to bolster its capabilities in the medical segment.

Lim says Scomnet wants control over a potential company if it requires Scomnet’s guidance to build its business. It will agree to take a minority stake in the potential company if it already has its own technology and Scomnet can learn from it.

Apart from looking for inorganic growth opportunities, Scomnet executive director Kevin Hsueh Chih-Yu says the group will continue to expand organically. Last year, it acquired a factory — located opposite the plant of its main automotive customer Stellantis NV, which is the principal of Peugeot — in Gurun, Kedah.

“We plan to invest RM15 million in the first phase of the Gurun factory. Once completed, we will move our automotive segment operations in Sungai Petani to the new factory. This will free up space to cater for our medical segment,” Hsueh says, adding that the implementation of the plan will take one to two years.

“We also recently signed a sale and purchase agreement to purchase a piece of land near our current plant in Sungai Petani for RM6 million. Once the deal is done, we plan to build a three-storey building at a cost of RM30 million. This new building will cater for the growth of the medical segment over the next three to five years,” says Hsueh, who is the son of Scomnet’s managing director and major shareholder James Shiue Jong-Zone.

Currently, Scomnet’s medical segment capacity utilisation rate is 70% to 95%. The utilisation rate of its automotive segment capacity stands at 10% while that of its industrial segment is 35%.

Hsueh says Scomnet will fund its proposed acquisitions and plant expansion through internal cash reserves. The group had a net cash balance of RM32.5 million as at March 31, 2024, including cash and equivalents of RM17.4 million. It does not have any borrowings from banks.

Lim says the group has no plans to raise funds by way of issue of equity shares of the company or through bank borrowings, as the group had RM166.28 million of investments in money market funds as at end-December 2023, which can be converted into ready cash without affecting its gearing.

“Scomnet maintains sufficient cash reserves from operational profits and cash flow to fund its capital expenditure. Approximately 50% of the profit generated each year is kept as reserves.

“The management also prudently allocates funds to ensure that shareholders’ interests are safeguarded and not neglected. This conservative financial approach ensures stability and avoids reliance on external borrowings to finance activities such as plant expansion and the purchase of raw materials,” he says.

Still, it will consider the proposal for fundraising if a major merger and acquisition emerges, Lim says.

According to Hsueh, Scomnet has significantly enhanced its visibility and credibility among investors, customers and partners, attracting more interest and confidence in its business following the transfer of its ACE Market listing to the Main Market of Bursa Malaysia last August.

“The Main Market provides access to a broader and more diverse investor base, including institutional investors who may have restrictions on investing in companies listed on secondary markets. For example, the Employees Provident Fund (EPF) has become a substantial shareholder after our successful listing on the Main Market. This transition has strengthened our shareholder base and supported our growth ambitions,” he says. As at July 11, 2024, EPF owned a 5.33% stake in Scomnet.

Scomnet has been growing explosively since it acquired the remaining 80% stake in SMP, a manufacturer of medical cables and devices, in 2018 for RM80 million to broaden its revenue and earnings base. For the financial year ended Dec 31, 2018 (FY2018), its net profit breached the RM10 million mark for the first time at RM11.17 million, a jump of 331% from the RM2.59 million registered in the prior year. Its revenue increased 164% to RM88.29 million from RM33.45 million in FY2017.

It recorded its highest-ever annual net profit of RM32.9 million and revenue of RM158.3 million for FY2022, thanks largely to the medical segment.

The group expects the segment to continue to be the main driver of growth in FY2024, given the introduction of new products, followed by the automotive and industrial segments.

In 1QFY2024, Scomnet achieved a net profit of RM8.1 million, an increase of 15% year on year (y-o-y) on revenue of RM36.1 million. The medical segment contributed 76% to sales, while the automotive and industrial segments accounted for 5% and 19% of revenue respectively.

Lim says the automotive segment was hit by low orders for wire harness from Stellantis in 1QFY2024, but is expecting the decline in demand from this segment to be temporary. Stellantis is expected to increase its orders following the completion of its revamp of its Peugeot operations in Malaysia. It will directly handle its distribution and sales here and launch more vehicle models.

“In addition, we are currently in the final stage of an audit with a potential new customer. If this audit result is successful, we anticipate that this project will begin contributing to our revenue in the latter half of FY2024, which will see the automotive segment’s contribution surpassing that of the industrial segment in FY2024,” he says.

He declined to disclose the potential new customer’s name except to say that its contribution to revenue will be significant. “We acknowledge the risk of relying heavily on a single customer within the automotive segment. Therefore, we are actively working to diversify our customer base by acquiring new clients. This strategic initiative aims to stabilise and potentially increase our revenue contributions from the automotive segment in the future.”

Meanwhile, the medical segment is poised for more growth in the second half of FY2024, with several new products planned for a soft launch. These include smart cables and electroencephalography (EEG) cables.

Lim says the group is working closely with a US-listed customer on the new smart cable development, while the EEG cables are for a European customer. “Based on the customers’ sales projections, the production of these two new medical products could potentially increase revenue from the medical segment by at least 50% for FY2025.”

After a subdued FY2023, Scomnet is likely to see a better FY2024, with the new products coming on stream in the second half. However, it sees growth breaking out in FY2025 to give the group another record-breaking year.

In a March 5 report, TA Securities forecasts Scomnet’s FY2024 net profit to come in at RM39.2 million, and FY2025’s at RM49.5 million.

“We have a few other new medical products in the pipeline, including one to cater for Stage 1 and Stage 2 cancer. It is in the final stage [of obtaining] the US Food and Drug Administration’s (FDA) approval. If everything goes well, this potential new product will be launched in the second half of 2024 or early 2025,” Lim says, noting that the group has earmarked more than 10 new medical products for launch over the next one to two years.

The industrial segment, Lim says, is expected to remain stable, with no major changes anticipated. “Our focus will be on producing wires for internal use, ensuring efficiency and consistency in our operations.”

Hsueh says one of the challenges the group foresees is FDA approval or CE marking for its new products in the medical segment. “This process can be time-consuming and uncertain, potentially delaying product launches and impacting our projected growth.”

Lim concurs, noting that the process can take two years to as long as five years, depending on the complexity of the product. He cites the Plass Rescue Occluder, which was designed to manage and control heavily bleeding wounds. “We completed development of the product three years ago, but FDA approval is still pending.”

Meanwhile, a weak ringgit works in favour of export-oriented companies like Scomnet. “We purchase our raw materials in ringgit and sell our products in US dollars,” says Lim.

Still, to protect itself from pricing pressures and stay competitive, Hsueh says, the group continues to shift to higher-margin medical products where the barrier to entry for a new player is high, unlike the industrial segment.

“Previously, we were big in the industrial segment, with major Japanese companies such as Sony, Yamaha and Matsushita (Panasonic) as our customers. But we noticed that it was very easy to enter the electronic industrial segment and very easy for customers to cancel their orders within three to six months because they had several suppliers to source their products from. That’s when we carried out long-term planning for Scomnet and decided that we wanted to be involved in industries whose barriers to entry are high and we took it from there,” he says.

The shift has worked out well for Scomnet. It has a proven track record premised on long-term strategic partnerships of 15 to 20 years with Tier-1 healthcare partners such as New York Stock Exchange-listed Edwards Lifesciences Corp and Danish medical device company Ambu A/S.

But Scomnet is not stopping with three business segments. It is exploring an expansion into the aerospace industry. “We have started to look at the regulatory requirements in the aerospace sector,” says Lim.

However, he points out that the group is not in a rush to broaden its product portfolio and will continue to focus primarily on the medical and automotive segments.

Meanwhile, Hsueh says Scomnet does not have a fixed dividend policy. “However, based on our past record, the management typically distributes around 50% to 60% of the current year’s profits as dividends, with the remaining funds reserved for reinvestment purposes.”

Its dividend per share stood at two sen for FY2022 and FY2023, translating into a payout ratio of 47% and 57% respectively.

Shiue and his family are the single largest shareholder at Scomnet, owning a direct stake of 13.706% and an indirect stake of 40.147%.

At last Friday’s close of RM1.53, Scomnet had a market capitalisation of RM1.3 billion with a forward 12-month price-earnings ratio of 33.26 times. The stock’s share price has risen 25% year to date. 

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