FoundPac’s chip R&D investment, mass production to provide earnings growth

The growth engine to be driven by volume in FY21 instead of a hefty ASP owing to the maturity of the 5G chip R&D cycle


FOUNDPAC Group Bhd’s bottom line is projected to grow at a compound annual growth rate of 13% for the financial year 2020 (FY20) until FY22 underpinned by its stiffener and sockets division, while the laser stencil division is expected to grow moderately due to capacity restriction.

JF Apex Securities Bhd said the growth engine would be driven by volume in FY21 instead of a hefty average selling price (ASP) owing to the maturity of the 5G chip research and development (R&D) cycle.

The broker expects FoundPac’s R&D activities to see a strong recovery in FY22, mainly because of the huge capital expenditure investments in the Internet of Things after the prevalence of 5G connectivity where people would demand more applications on the back of fast and low latency connections.

“FoundPac plays a critical role in supplying upstream and downstream players. Therefore, there will be a huge demand from mass productions of semiconductors and chips for testing purposes from downstream players such as ASE Technology Holding Co Ltd, Amkor Technology Inc and JCET Group Co Ltd at the later stage amid slowing down in R&D activities,” it said in a report yesterday.

JF Apex stated that FoundPac’s high-performance computing, cloud server, automation manufacturing facilities and data server would need more chips to materialise extraordinary computational power.

It said FoundPac is specialised in precision engineering, especially in customisation, and it has no direct competitor in the business circle mainly because buyers have been requesting for unique stiffeners and test sockets in most of the orders to conduct testing in R&D and mass production activities, whereby these products are selling at a premium to ordinary products due to its exclusive usages.

Hence, it said FoundPac is required to fulfil clients’ customised orders rather than standardise the product design.

Moving forward, the report said the ASP of both products will rise followed by smaller nodes (3nm and 5nm) and advanced level of semiconductor chip packaging such as the system in a package and antenna in package in which more precise and complex engineering will be needed.

“The group has established a strong foothold in developed markets such as Europe and the US, stemming from lower lead time and advanced design capability. In short, the group has an advantage over regional players in the US, Germany, South Korea and Japan amid their strategic locations,” the report added.

FoundPac is also venturing into the automotive segment, which JF Apex said, would allow the group to take advantage of any uptrend in  the sector.

The report said FoundPac’s move to obtain the international standard IATF 16949 certification, which is expected by mid-2021, is favourable as autonomous cars could materialise from 2023 onwards backed by 5G seamless connections.

FoundPac has a RM51.1 million cash pile, which is 47.3% of total assets, as of June 2020.

JF Apex estimated the group will continue to remain in a net cash position for the next two years on the back of disciplined balance sheet management.

FoundPac has a dividend policy of paying out at least 30% of net profit and is expected to declare higher dividends for FY21 to FY22, with the dividend payout rate rising to 40%.

FoundPac used to declare a 40% to 70% payout historically, coupled with its anticipated stronger profits. JF Apex made a ‘Buy’ call with a target price of RM1.30 on FoundPac.