i-Stone shares worth subscribing, says Inter-Pacific Research

By NG MIN SHEN / Pic By BLOOMBERG

INTER-PACIFIC Research Sdn Bhd has a ‘Subscribe’ call on Johor-based automation solutions provider i-Stone Group Bhd with a target price of 18.5 sen, ahead of the group’s initial public offering (IPO) on the ACE Market of Bursa Malaysia on July 17 at an offer price of 16 sen a share.

“We are ascribing a valuation of 15.5 times price-to-earnings ratio (PER) pegged to its earnings per share of 1.2 sen for the financial year ending Dec 31, 2020 (FY20), giving it a fair value of 18.5 sen, translating into a potential return of 19.6% inclusive of dividends,” Inter-Pacific Research said in a report yesterday.

The PER valuation of 15.5 times is within the valuation range of automation equipment peers of between 8.9 times and 19.7 times.

At the launch of its IPO prospectus last month, i-Stone said the listing will entail a public issue of 244.3 million new ordinary shares in the group and an offer for sale of 122.1 million existing shares by way of private placement to selected investors, at an issue price of 16 sen per share.

The company plans to use 34.5% or RM13.48 million of the proceeds raised to repay borrowings, while 17.4% or RM6.8 million will go towards construction of a new design and development centre that will be completed within 48 months of the listing.

The rest will be allocated for process and product development, capital expenditure, working capital requirements and listing expenses.

The ACE Market-bound i-Stone is principally involved in the design, manufacturing and modification of specialised automation machines, maintenance and technical support services, as well as the provision of data management systems.

British home appliances firm Dyson Ltd is one of its major clients, to whom i-Stone supplies most of Dyson’s test and inspection customised machines, thus marking a major investment merit for Inter-Pacific Research.

“The group’s revenue expanded at a compound annual gross rate (CAGR) of 15.42% between 2015 and 2018, driven by increasing purchase orders from Dyson. Dyson orders increased at a CAGR of 22.9% over the same period,” it said.

According to management guidance, Dyson has been expanding its capacity annually at a rate of about 20%, and will launch three new pro-ducts in 2019.

Malaysia continues to be a preferred hub for the British firm for production of its home appliances, due to the well-developed electronic manufacturing services supply chain here and a pervasive respect for intellectual- property rights.

“We envisage the group will continue to ride on Dyson’s capacity expansion, following a string of successful new Dyson product launches,” the research firm added.

Inter-Pacific Research forecast that i-Stone’s move to develop its own proprietary products to meet market demand for higher automation in the manufacturing process will serve as the next earnings growth inflection point.

i-Stone’s MD and ED are former electronic engineers at Dyson and have over 16 years of experience in the manufacturing business, thus positioning the group well to pursue future growth milestones.

On the downside, major risks include a slowdown in the global economy that could impact consumer spending on end-user electronics, as well as the group’s dependence on its good relationship with Dyson.

“The Dyson group of companies contributed 54.1%, 61.5%, 66.5% and 65.5% to the group’s overall revenues for FY15, FY16, FY17 and FY18. Its supply of machinery is not made under long-term contracts, as is usual industry practice.

“The loss or reduction of orders from this major customer will negatively affect the group’s financial performance. In the immediate future, the group intends to enlarge its customer portfolio to diversify its customer concentration risk,” Inter-Pacific Research noted in its research report.

Failure to keep up with industry demand for more advanced automation and innovation could also hit the group’s top line growth, as would a shortage of labour and qualified engineers.

“A typical manufacturing sector business in Johor Baru suffers from attrition of engineers and production floor workers, owing to far more attractive wages offered in Singapore,” the research house cautioned.

Inter-Pacific Research forecast i-Stone to post a profit after tax of RM12.7 million and RM13.9 million in FY19 and FY20 respectively, representing earnings growth of 11.3% in FY19 and 14.4% in FY20, driven by higher sales of specialised automation machines and higher gross profit margin from economies of scale.