TA Securities sees upside in Volcano’s IPO


VOLCANO Bhd’s IPO price has upside potential partly backed by its exposure to the recovering electrical and electronic (E&E) products and automotive markets.

TA Securities Holdings Bhd analyst Wilson Loo said the ACE Market-bound company has a fair value of 47 sen per share, a 34.3% upside from its IPO price of 35 sen per share. He said Volcano is currently priced at a trailing price-earnings of 15.1 times against its financial year 2020 (FY20) core earnings per share.

“The fair value takes into consideration the group’s proven track record and strong portfolio of customers, experienced management team, growth prospects backed by exposure to growing E&E and automotive markets, and its wide range of solutions,” Loo said in a recent note.

He added that forward yields are also decent with TA Securities’ projections for FY22 and FY23 at 4.5% and 5.3% respectively.

Loo said the group’s competitive advantages include its established experience in manufacturing nameplates and plastic injection moulded parts of over 20 years, and its long-term business relationships with major clients, which includes companies like Donaldson (Thailand) Co Ltd, Fisher & Paykel Appliances Thailand Co Ltd, Hewlett-Packard Co, Bernina (Thailand) Co Ltd and Beko Thai Co Ltd.

“About 90% of Volcano’s customers are either foreign-based or multinational companies. The group also has a strong relationship with its major suppliers for three to 14 years, which allows for timely supply of raw materials,” he said.

Volcano announced last week its plan to raise RM8.75 million from the IPO, which will be used to acquire laser-cutting and pick-and-paste machines to improve the efficiency and capability of its nameplate manufacturing process.

Volcano MD Datuk Ch’ng Huat Seng said the company also seeks to expand its factory in Rayong, Thailand, as the group extends its presence in the E&E and automotive industries in the country.

Its principal markets are Singapore and Thailand, and its foreign markets accounted for more than 95% of its overall revenue for the FY20 ended Dec 31.

The company is expected to be listed on the ACE Market on April 6, 2021.

Loo said the company’s plan to purchase six units of laser-cutting machines is expected to increase its production capacity by 33% to 55.5 million units yearly.

“This will allow the group to capture growth opportunities as its existing laser-cutting operations have been running at high utilisation of 85% to 96% from FY18 to FY20,” he said.

Barring any slowdown by the pandemic, both the E&E and automotive markets are expected to recover alongside the economy, of which the Volcano is expected to benefit from, Loo said.

“The E&E market is also seeing strong demand for appliances and devices amid remote learning and working trends. Volcano is expected to benefit via increased demand for nameplates and plastic injection moulded parts,” he said.

Loo said Volcano can also capitalise on its capacity to manufacture nameplates and plastic injection moulded parts at its plant in Rayong by being a one-stop solution provider for customers that require both parts and components.

“It is also able to add value by assembling nameplates onto plastic injection moulded parts as a final product to customers,” he said.

In terms of its balance sheet strength, Volcano has a net cash position of RM12.9 million with zero borrowings as of the end of FY20.

“Post-IPO, with RM8.8 million expected to be raised, we project its net cash position to strengthen to less than RM20 million,” Loo added.

The group also has a dividend policy of distributing at least 30% of its profit after tax (PAT) and has paid out 58%, 42% and 92% of its PAT for FY18, FY19 and FY20 respectively.

“Based on an assumed dividend payout of 40%, we project forward yield of 1.9%, 4.5% and 5.3% in FY21, FY22 and FY23 respectively,” Loo said.