On 9 May 2023, we had the privilege of attending the Edelteq Holdings Bhd Prospectus Launching Briefing, where we were immersed in the world of cutting edge technology and engineering support for the semiconductor industry. We were instantly captivated by an IPO not only radiated an irresistible appeal but also showcased rock-solid fundamental qualities.
Now, let us delve into the key takeaways and fundamental qualities that make this company a compelling investment opportunity.
IPO price: RM0.24
PE Ratio: 23.5x
Tentative Listing Date: 30 May 2023
Board: ACE Market
Opening of Application: 9 May 2023
Closing Application: 17 May 2023 (Today)
Balloting of Application: 19 May 2023
Allotment of IPO Shares to Successful Applicants: 26 May 2023
Background
Edelteq is an investment holding company. They are principally involved in the provision of engineering support for IC assembly and test processes in the semiconductor industry. Their products and services primarily support the IC assembly and test process conducted by their customers in the semiconductor industry. Their customers comprise primarily ISMs and OSATs. IDMs are semiconductor companies that are involved in design, fabrication, assembly and testing for ICs.
Business Model
The semiconductor industry encompasses companies involved in the design, manufacturing, assembly, testing and sales and marketing of semiconductor chips, or semiconductor ICs.
The company mainly serves multinational integrated design manufacturers (IDMs) / brand owners of ICs and outsourced semiconductor assembly and testing (OSATs) companies involved in the automotive, telecommunications, optoelectronics and memory industries.
Edelteq has 4 core activities:
1) Design and assembly of IC burn in boards and supply of PCBs (52% of FY22 revenue)
2) Supply and refurbishment of IC assembly and test consumables (20% of FY22 revenue)
3) Design, development and assembly of ATE and factory automation (25% of FY22 revenue)
4) Trading of operating suppliers, spare parts and tools for IC assembly and testing (3% of FY22 revenue)
Key Takeaways
1. Edelteq has a strong key management background as the key management team has accumulated >20 years of experience across the optoelectronics, electronics and semiconductor industries. We believe strong management can lead the team to grow together.
2. The group also enjoyed a lower tax rate as its wholly-owned subsidiary Edelteq Technologies Sdn Bhd was granted Pioneer Status for a full tax exemption for 5 years since Jan 2020.
3. Edelteq has a strong portfolio of MNC customers. In FY2022, more than 85% revenue are derived from MNCs. The lion’s share of its revenue (77.6% or RM18.9mil) is from the domestic market, whilst overseas markets such as Singapore, China, Thailand and the US accounted for the remaining 22.4%.
4. The group recorded a 3-year revenue and net profit CAGR of 25% and 114% respectively, supported by design & assembly of IC burn in boards (53%), design, development & assembly of ATE and factory automation (59%) and trading of spare parts & tools for IC assembly & testing (134%).
5. The group’s net profit margin showed remarkable improvement from 4% to 22% over time. This improvement was primarily attributed to reduced costs associated with subcontracting processes, leading to lower expenses.
6. As of April, Edelteq had an outstanding purchase order worth RM7.1mil, which is anticipated to be fulfilled within the current year. Analysts anticipate a sales recovery for the group in FY2024 and FY2025, driven by factors such as inventory depletion and a rebound in demand. This recovery is expected to be supported by various catalyst arising from secular trends, including 5G, artificial intelligence, high performance computing, the Internet of Things, and electric vehicles, among other factors.
7. Edelteq had a net cash position of RM3mil with cash and bank balances of RM6.2mil and borrowings of RM3.2mil as at end-Dec 2022. Edelteq has a healthy gearing ratio of 0.2x in FYE2022. Post IPO, Edelteq aims to distribute dividends amounting to a maximum of 20% of its net profit.
8. Edelteq intends to utilise 43% of the IPO proceeds of RM24mil to repay the bank borrowings for proposed Batu Kawan factory, followed by construction expenses (15%), estimated listing expenses (15%), working capital (14%) and the rest for R&D expenditure.
9. Edelteq’s proposed Batu Kawan factory is projected to have a built-up area of 43,500 sqft, encompassing production, storage, and office space. The company’s objective is to initiate operations at the plant by Mar 2024. We anticipate that the establishment of the Batu Kawan facility will contribute significantly to the company’s growth.
10. Upon completion of the factory, the annual capacity of design and assembly of IC burn-in boards and supply of PCBs are anticipated to increase by 30% each, while refurbishment of dicing blades and PCBs gold fingers are estimated to grow by 400% and 100% respectively.
11. Edelteq also intends to enhance its factory automation solutions, as well as widen its product and service portfolio for ATE and IC assemble, and test consumables to cross sell to its existing and potential customers. The group’s R&D activities are assumed to be completed by the end of 2024.
12. The utilisation rate for the assembly of IC burn-in boards, production of chip scale package (CSP) carriers, refurbishment of PCB gold fingers and assembly of ATE & factory automation stood at 78%, 54%, 40% and 89% respectively in 2022.
13. Nevertheless, the group faces significant risks, primarily related to customer concentration, particularly concerning Infineon Technologies (Malaysia) Sdn Bhd and Customer A.
Disclaimer:
The research, information and opinion expressed in this article / video are purely for information and educational purpose only and should not be construed as investment advice. We will not liable for any losses or damages suffered from your investment decisions. Kindly consult a licensed investment advisor if you wish to get any investment advice.
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