This article first appeared in Capital, The Edge Malaysia Weekly on October 14, 2024 - October 20, 2024

PENANG-based Northeast Group Bhd is expected to make its public debut on Tuesday, Oct 15, the 30th company to list on the ACE Market of Bursa Malaysia this year.

The precision component manufacturer’s initial public offering (IPO) recorded an oversubscription of 73.42 times for the 37 million new shares offered to the Malaysian public as it received 29,702 applications for 2.75 billion shares worth RM1.38 billion.

The IPO consisted of an issuance of new shares and offer for sale shares, bringing the total to 220.79 million shares, representing about 29.84% of its enlarged issued share capital.

About 168.99 million new shares were issued at 50 sen apiece, raising RM84.5 million in proceeds. The public issue comprised 37 million shares open to 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.

A separate tranche of 51.8 million existing shares representing 7% of the enlarged issued share capital, worth RM25 million, would go entirely to the selling shareholders, including managing director Ng Chay Chin and his brother Ng Chai Hee, who is 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 had also put up their shares for sale.

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

The bulk of the RM84.5 million in proceeds or 47.34% from the public issue will be allocated for the construction of a new factory that is expected to have a production floor space of about 79,020 sq ft. Northeast has also earmarked 23.67% of the proceeds to repay bank borrowings and 14.65% for the purchase of new 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.

Northeast was founded in 2004 and specialises in the manufacturing of precision engineering components used in various industries, including in photonics, electrical and electronics, semiconductor, telecommunications and optoelectronics. The company also provides surface finishing, sheet metal fabrication and mechanical sub-assembly.

The company currently operates three factories in Juru and Bukit Minyak, Penang. All the factories are operating at full capacity, according to its prospectus.

At 50 sen per share, Northeast’s IPO was valued at a price-earnings ratio (PER) of 20.16 times based on earnings per share of 2.48 sen for the financial year ended May 31, 2023 (FY2023). When the company is listed on Tuesday, it will have a market capitalisation of RM370 million.

Among its listed peers on Bursa are UWC Bhd (KL:UWC), CPE Technology Bhd (KL:CPETECH), SFP Tech Holdings Bhd (KL:SFPTECH), YBS International Bhd (KL:YBS), Coraza Integrated Technology Bhd (KL:CORAZA) and Wong Engineering Corp Bhd (KL:WONG).

For FY2024, Northeast posted an 11.3% decrease in net profit to RM12.36 million from RM13.94 million a year earlier, on the back of a 5.4% decline in revenue to RM62.21 million from RM65.75 million previously. The company’s profit after tax (PAT) margin stood at 19.9% in FY2024 and 21.2% in FY2023. Its overseas business accounted for the lion’s share of revenue, contributing 71.5% in FY2024, mainly from the US and UK markets.

RHB Research estimates Northeast to be fairly valued at 62 sen, based on 21 times PER for forecast FY2025 earnings, or 24% higher than its IPO price. The research house says the PER is benchmarked against other precision engineering players and it projects a three-year earnings compound annual growth rate (CAGR) of 15.1%, driven by an anticipated recovery in the semiconductor industry which is expected to boost the company’s utilisation rates.

“Our target PER is derived by applying a 25% discount to the FY2025 forecast average trading PER of its larger peers UWC and SFP Tech, which traded at 28 times, considering Northeast’s smaller market capitalisation and revenue base,” it says in an Oct 3 report.

“Northeast remains at a premium to Coraza on its stronger net margin of 18% to 26% compared to the latter’s 6% to 12%. We believe these margins are sustainable, supported by Northeast’s strategic focus on undertaking more complex, high-precision and high-mix manufacturing.”

Northeast says it does not maintain an order book as the company has long-term contracts with its customers and its sales are based on confirmed purchase orders on an ongoing basis.

Malacca Securities Sdn Bhd accorded Northeast a higher fair value of 76 sen per share, or a 52% upside to its IPO price. Its valuation is based on a PER of 25 times, pegged to the mid FY2026 forecast earnings per share of 30.4 sen as the company operates in the industrial products and technology sector, which has a long-term PER of 24.8 to 32.2 times.

Malacca Securities has projected for Northeast to generate a CAGR of 14.9% over the next three years with core PAT expected to reach RM17.8 million to RM24.2 million over the period, supported by the expansion of operational facilities and sustainable growth in the local and global semiconductor and telecommunications sectors.

“Northeast has a strong 20-year track record in the industry. Over 70% of its revenue is generated from exports, with a key strength being its ability to meet stringent internal QA/QC standards and internationally recognised certifications. This has enabled Northeast to build longstanding relationships with its customers,” it said.

“Additionally, the group has consistently improved its PAT margins, rising from 17.5% in FY2021 to 19.7% in FY2023, and standing at 19.9% in FY2024.”

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