• MYR0.62 FV, based on 21x FY25F P/E. Northeast Group aims to raise MYR84.5m from its IPO, primarily to fund the construction of its new factory and business expansion plans. Our 21x target P/E is benchmarked against the precision engineering players and projected 3-year earnings CAGR of 15.1% – driven by the anticipated recovery in the semiconductor industry, which is expected to boost Northeast’s utilisation rates. It is principally involved in precision engineering component manufacturing used across the photonics, E&E, semiconductor, telecommunication, and optoelectronics industries.

• Expansion plans. It has earmarked MYR40m from the IPO proceeds to fund the construction of a new factory, which will see an additional 79,020sq ft (+72.3%) in production floor space upon completion. This will allow the group to have additional space to increase manufacturing capacity and take on new customers, and more complex and larger orders. MYR12.4m is allocated for the purchase of new computer numerical control (CNC) machines that will boost estimated annual operating capacity and enable Northeast to meet anticipated demand from customers in terms of order volumes and complexity. This is also in line with the group’s aim to grow its customer base.

• FX exposure. Northeast has notable exposure to the USD – c.60% of financial period ended 31 May’s (FPE24) revenue. Although it does not employ any financial instruments to hedge this exposure, impact of the strengthening MYR is guided to be minimal, as it primarily handles short-term orders and has the flexibility to quote prices in real time, allowing adjustments for FX fluctuations.

• Forecasts. We are forecasting a 3-year earnings CAGR of 15.1%, primarily driven by the semiconductor recovery, which is expected to improve utilisation rates. This is in line with SEMI’s projections of a FY24 recovery in sales for the front-end (+5.4%), test (+7.4%), and assembly & packaging equipment (+10%) segments, with further acceleration expected in 2025 across all sub-segments. As a key supplier to leading equipment makers and electronics manufacturing services (EMS) players, Northeast is well positioned to capitalise on the semiconductor demand recovery. Additionally, higher order volumes from both existing and new customers should enhance margins through operating leverage and economies of scale. Further growth is expected beyond 2027, with the completion of a new facility that will expand production floor space by 72.3%.

• Valuation. Based on an ascribed P/E of 21x on FY25F earnings, we derived a FV of MYR0.62. Our target P/E is derived by applying a 25% discount to the FY25F average trading P/E of its larger peers, UWC (UWC MK, NR) and SFP Tech (SFPTECH MK, NR), which trade at 28x, considering Northeast’s smaller market cap and revenue base. It remains at a premium to Coraza Integrated Technology (CORAZA MK, BUY, TP: MYR0.62) on its stronger net margins of 18-26% vs the latter’s 6-12%. We believe these margins are sustainable, supported by Northeast’s strategic focus on undertaking more complex, highprecision, and high-mix manufacturing. Key risks include order fluctuations, technology obsolescence and FX fluctuations.

Source: RHB Securities Research - 3 Oct 2024