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Monday, March 16, 2015

Improving product mix to boost EG Industries profits (Edge)

EG Industries Bhd ( Financial Dashboard), which saw the emergence of Singapore-based Jubilee Industries Holdings Ltd ( Financial Dashboard) as a substantial shareholder last year with a 30.49% stake, expects to improve its gross profit margin to at least 5% in the current financial year ending June 30, 2015 (FY15) from 3.2% previously by enhancing its product mix to become a one-stop electrical and electronic solutions provider.

Its executive chairman Terence Tea Yeok Kian said EG Industries (fundamental: 2.1; valuation: 0.55) currently has the lowest gross margin percentage among industry peers, which typically earns about 10% to 15%.

For one, the electronic manufacturing services (EMS) provider is diversifying into higher margin business segments such as plastic injection.

“With the plastic injection business on board, the group is able to provide more comprehensive EMS services and expand its customer base. This will help to improve our profit margin,” Tea told The Edge Financial Daily during a recent visit to the group’s production plant here.

The group is also moving towards manufacturing more consumer electronic products, which provides higher margin.

“We are looking to increase our non-data storage business to 40% from 20% now. We are currently in talks with nine European consumer electronic brands,” he said, adding that the group has been receiving orders from European consumer electronic product makers such as Dyson (UK) and Oxylane (France) in the last few months.

Currently, EG Industries derives 80% of its revenue from a single customer, Western Digital (M) Sdn Bhd.

EG Industries group chief executive officer Alex Kang said the group is also moving from original equipment manufacturing towards original design manufacturing in order to demand better margins.

“We have set up a research and development facility in Penang. Our target is to produce 12 innovative [consumer electronic] models every year,” he said.

Tea assumed his current role as executive chairman and Kang as group chief executive officer on July 18 last year, following Jubilee Industries acquisition of a 26% stake in EG Industries, acquired by way of a direct business transaction.

Singapore-listed WE Holdings Ltd (fundamental: 1.55; valuation: 0.9), meanwhile, has an indirect stake of 30.49% in EG Industries through Jubilee Industries (fundamental: 1.65; valuation: 1.2).

Jubilee Industries is a provider of precision plastic injection mould designs and fabrication, as well as precision plastic injection moulding, while WE Holdings is a distributor and manufacturer’s representative of a range of electronic components, systems and power.

Tea is also executive chairman and managing director of WE Holdings.

“There are a lot of synergies among these three companies as they are all in the same industry. Their businesses complement each other. The integration among these three companies is ongoing and is expected to be completed by the end of FY15,” said Tea.

He noted that by integrating the three companies under one roof, EG Industries can provide competitive pricing and better solutions and services.

“With all these investments, we are looking at a double-digit revenue growth every year. Our target is to double our annual revenue to RM2 billion in two years,” said Tea.

EG Industries saw its net profit for the second quarter of FY15, Dec 31, 2014 (2QFY15) surge 1,924.8% to RM10.28 million from RM508,000 a year ago, boosted by a higher margin sales mix and fair value gain of RM8.8 million on the realisation of available-for-sale financial assets.

This was despite posting lower revenue of RM219.08 million in 2QFY15 from RM262.04 million a year ago.

For the six-month period, it recorded a net profit of RM17.85 million, a surge of 1,285.6% from RM1.29 million. Revenue was lower by 9.2% to RM462.7 million versus RM509.4 million in the first half of FY14.

The group has currently secured RM400 million to RM500 million worth of orders, which will keep it busy for the next six months. Most of these orders are for its printed circuit board assembly (PCBA) device used in hard disk drives and box build consumer electronic products.

Meanwhile, Tea said the group has allocated a capital expenditure (capex) of RM30 million for FY15 and FY16. “Most of the capex will be utilised for our PCBA and plastic injection businesses.”

The group is undertaking a corporate exercise involving a par value reduction of its shares to 50 sen each from RM1 per share as well as a private placement of up to 9.17 million new shares, and a renounceable rights issue of up to 151.28 million new shares together with up to 75.64 million free warrants, which is expected to be completed in May.

“We will be raising at least RM60 million from the corporate exercise, which will be used for business expansion,” said Tea, adding that the group continues to actively seek potential merger and acquisition opportunities within the EMS and related sectors.

With three PCBA manufacturing facilities, two in Malaysia and one in Thailand, EG Industries is planning to open a new plastic injection moulding facility here.

EG Industries shares closed down 2.89% at 84 sen, giving it a market capitalisation of RM62.78 million.

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