KUALA LUMPUR (Oct 2): Northeast Group Bhd, a precision components maker en route to the ACE Market, could be worth 18% more than its initial public offering (IPO) price thanks to strong revenue and profits, said TA Securities.

The research house projected a fair value of 59 sen for Northeast Group, compared to its IPO price of 50 sen apiece. At the projected price, the company would be valued at 20 times the estimated core profit for FY2025.

“Moving forward, we forecast revenue and core profit to be stronger, underpinned by the business expansion plan and the demand recovery for precision engineering components,” said TA Securities.

Founded in 2004, the Penang-based company specialises in the manufacturing of precision engineering components used in the photonics, electrical and electronics, semiconductor, telecommunication and optoelectronics industries. Further, the company also provides surface finishing, sheet metal fabrication and mechanical sub-assembly.

Applications for Northeast Group’s IPO will close on Oct 3, with the listing scheduled for Oct 15.

The listing offers investors a 29.84% stake in Northeast Group that made a profit after tax of RM18.36 million for the financial year ended Sept 30, 2023 (FY2023). Upon listing, the company is expected to have a market capitalisation of RM370 million.

At an IPO price of 50 sen per share, Northeast Group would be valued at 22 times FY2023’s earnings. That compares to trailing earnings multiple of peers CPE Technology Bhd (KL:CPETECH) at 55.9 and SFP Tech Holdings Bhd (KL:SFPTECH) at 42.5.

TA Securities estimated earnings growths of 2.3% to RM17 million for FY2024 and 23% to RM20.8 million for FY2025, supported by business expansion plan as well as a better industry outlook. The projections took into account 2%-15% revenue growth for FY2024-FY2025, among others.

The research house also cited Northeast Group’s established track record, long-standing relationship with customers and experienced management team.

Most of the group’s revenue is derived from overseas customers — including the US, UK, Russia and Germany — which contributed around 73.9% of FY2023’s total revenue, while the local market accounted for 26.1%.

Malacca Securities has a fair value of 76 sen for Northeast Group based on forward earnings multiple of 25 times, noting that the company operates in the industrial products and technology sectors where the long-term earnings valuations stands at 25x-32x.

Northeast Group’s IPO aims to raise up to RM110.4 million from the sale of 168.99 million new shares and an offer for sale of 51.8 million existing shares.

The public issue comprises 37 million shares for the public, 29.6 million shares for eligible persons, 61.69 million shares through private placement to selected investors and 40.7 million shares through private placement to identified Bumiputera investors.

About 47.34% of the gross proceeds from the public issue will be allocated for the construction of a new factory that will provide a total production floor space of about 79,020 sq ft and accommodate about 200 units of computer numerical control machines (CNC) to support production activities.

Currently, the company operates at three factories located in Juru and Bukit Minyak, with all the floor space fully utilised.

Northeast Group has also earmarked 23.67% of the proceeds to repay bank borrowings and 14.65% for the purchase of 36 new CNC machines to increase its estimated annual operating capacity, while 7.81% will be allocated for listing expenses and the remaining 6.53% for working capital.

Proceeds from the sale of existing shares, meanwhile, will go entirely to the selling shareholders including managing director Ng Chay Chin and his brother Ng Chai Hee, who is also senior operations director.

Executive director Chong Ewe Hean, senior business and sales director Yin Thien Hee, along with two other shareholders Ng Meng Hang and Tang Ah Lek will also put up their existing shares for sale.

Affin Hwang Investment Bank is the principal adviser, sponsor, sole placement agent and sole underwriter for the IPO.