Date: October 15, 2024
Broker: UOB Kay Hian Private Limited
Company Overview
Northeast Group Berhad (NE) is primarily engaged in the manufacturing of precision engineering components. These components are used across multiple industries including photonics, electrical and electronics (E&E), semiconductors, telecommunications, and optoelectronics. The company’s target sectors position it as a critical player in advancing technologies across these industries.
Stock Information
- Share Price: RM0.50
- Target Price: RM0.88
- Upside Potential: 76.0%
- Bloomberg Ticker: NE MK
- Market Cap: RM370.0 million (US$86.3 million)
- Shares Issued: 740 million
- Major Shareholders:
- Mountain Range: 53.7%
- Ng Chay Chin: 4.0%
- Chong Ewe Hean: 3.5%
Recent Performance and Financial Metrics
Northeast Group experienced a sharp decline in revenue and net profit in FY23 due to a global semiconductor downturn and weakened end-user demand. Despite this, the company remained profitable:
- Net Profit: RM18.4 million in FY23, with a net margin of 20%.
- Revenue Decline: 35% drop in FY23 due to semiconductor downcycle.
- Net Profit Decline: 51% decrease compared to the previous year.
However, Northeast Group is poised for a turnaround with a projected revenue and net profit growth driven by cyclical recovery and capacity expansion. The company reported stellar revenue growth of 28% from FY21 to FY22, and a forecasted revenue rebound starting FY25.
Key Investment Highlights
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Capacity Expansion and Growth Potential
Northeast Group plans to expand its factory floorspace and production capacity by:- Doubling Factory Floorspace: From 217,000 square feet to more than 435,000 square feet.
- Capacity Expansion: By increasing CNC machine capacity by 13%.
These expansions are aimed at capturing demand from the photonics, semiconductor, and E&E sectors, which are expected to experience strong growth in the coming years.
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Strategic Diversification
The company has established strong relationships with major clients in photonics, E&E, semiconductor, and telecommunications industries. These clients are leading players listed on NASDAQ, HKSE, NYSE, and SIX SE, which provides strategic insulation from industry cyclicality. Northeast Group’s diversification across these sectors helps mitigate the impact of downturns in any one industry. -
Robust Revenue and Profit Growth Forecast
A projected three-year revenue growth of 13% CAGR, along with a core net profit CAGR of 21%, is anticipated. This growth is expected from stronger order loadings across all customer segments, particularly in the photonics sector where two-thirds of Northeast Group’s total revenue is generated. -
IPO and Debt Reduction
Northeast Group has allocated RM20.0 million (23.7% of its IPO proceeds) for repaying term loans, which will reduce borrowings and improve the company’s net cash position. The company expects an interest savings of approximately RM0.93 million from this repayment. The reduction in debt levels is expected to decrease gearing to 0.07x post-IPO.
Future Outlook
With capacity expansion and recovery in the semiconductor and related industries, Northeast Group is expected to witness:
- Revenue Growth: From RM90.0 million in FY24 to RM134.5 million by FY26.
- Net Profit Growth: From RM16.7 million in FY24 to RM32.2 million by FY26.
- Earnings Growth: 39% improvement in FY25 net profit as the company benefits from cyclical recovery and technological advancements in its customer base.
Financial Projections
- FY24F Revenue: RM90.0 million
- FY25F Revenue: RM110.7 million
- FY26F Revenue: RM134.5 million
- Net Profit (Adjusted): RM16.7 million (FY24F) to RM32.2 million (FY26F)
- Earnings Per Share (EPS): Expected to rise from 2.3 sen in FY24F to 4.3 sen in FY26F.
Valuation and Recommendation
Northeast Group is currently trading at a low valuation, listing at 20.2x FY23 PE based on a trough earnings period. With a strong recovery projected, UOB Kay Hian has initiated coverage with a BUY recommendation and a target price of RM0.88, which is pegged at 28x FY25F PE. This valuation remains at a discount compared to its peers, offering potential upside for investors.
