Leveraging its engineering and machining capabilities, Northeast Group Bhd (NE) is principally involved in the manufacturing of customised precision engineering components for industries such as photonics, electrical and electronics (E&E), semiconductor, telecommunications, and optoelectronics, based on its customers' specific requirements and precise specifications. The Group also offers valueadded services such as surface finishing, sheet metal fabrication, and mechanical sub-assembly upon request to complement its precision engineering component manufacturing. Based in Penang, NE serves both local and overseas customers, including those from the US, UK, Thailand, Singapore, Russia, Canada, Germany, and Hungary.

NE plans to expand its production capacity by constructing a new factory with 79,020 sqft of production space and purchasing 36 computer numerical control (CNC) machines within 36 months, boosting the Group’s overall production capacity. Construction is set to begin in the fourth quarter of 2024, with operations expected to commence by the first quarter of 2027, supporting its future growth. We derive a fair value of RM0.59 based on a 22x PE multiple to its FY25F EPS of 2.7sen. The IPO is expected to raise approximately RM84.5m from the issuance of 169.0m new shares. Besides utilising 6.5% of the proceeds as working capital. 47.3% and 14.7% of the proceeds are allocated for construction of a new factory and purchase of new CNC machines, respectively.

• Growth drivers. NE’s growth will be driven by: i) construction of new factory, and ii) purchase of new CNC machines.

• Competitive strengths. NE’s competitive strengths include: i) established track record, ii) deliverables backed by engineering expertise, iii) exportoriented business with long-standing customer relationships, iv) product quality ensured by quality control and international standards compliance, and v) experienced management team.

• Catalysts. Key drivers may include: i) end-user industry growth and innovation driven demand for precision engineering components, ii) outsourcing of precision engineering for cost-effectiveness, and iii) government initiatives in supporting the precision engineering industry.

• Key risks. Key downside risks, among others, include: i) competition, ii) fluctuations in raw materials prices, iii) dependency on a major customer, iv) foreign exchange fluctuation, and v) workforce regulatory compliance.

Source: PublicInvest Research - 3 Oct 2024