EG Industries prepares for increased higher-margin orders

Group chief executive officer and executive director Datuk Alex Kang attributes EG Industries’ lower margin to its “different product mix”. Speaking to StarBizWeek, Kang says 80% of EG Industries’ revenue is from the lower-margin printed circuit board assembly (PCBA) segment.

EG Industries Bhd tends to go under the radar when one talks about listed electronic manufacturing services (EMS) players in Malaysia.

But, unknown to many, EG Industries has a predominantly international clientele, including Dyson, which it has served for more than a decade. However, while the group says it is one of the top-50 EMS players globally, its market capitalisation of RM195.8mil is only a fraction of the other major players in the sector.

For comparison, SKP Resources Bhd’s market capitalisation as of Dec 2 stood at RM2.84bil, while VS Industry Bhd, PIE Industrial Bhd and JHM Condolidation Bhd are valued at RM4.4bil, RM1.46bil and RM959mil respectively.

While EG Industries has one of the cheapest valuations, in terms of trailing price-to-earnings ratio, it also has a lower net profit margin compared to its industry peers.

In the financial year ended June 30, 2021 (FY21), the group’s net profit margin was recorded at a meagre 1.4% as it achieved a net profit of RM14.73mil against a revenue of RM1.05bil.

In the recently-announced first quarter of FY22, the margin was lower at 0.99%, as operational interruption due to Covid-19 restrictions affected the group’s performance.

To put it into perspective, for every RM100 it makes in sales, EG Industries only gets about RM1 in net profit after factoring in all expenses. That said, it is noteworthy that net profit margins of listed EMS players in Malaysia range at single digits.

Group chief executive officer and executive director Datuk Alex Kang attributes EG Industries’ lower margin to its “different product mix”.

Speaking to StarBizWeek, Kang says 80% of EG Industries’ revenue is from the lower-margin printed circuit board assembly (PCBA) segment. In comparison, other EMS players have a larger contribution from the box-build segment, which has a higher margin.

“Our plan to expand the box build contribution is still intact since we began in 2015 which contributed to a significantly improved net profit over the years. Currently, our box-build revenue is still at approximately 20% of the group revenue, even despite global pandemic issues accompanied by the material shortages.

“However, for FY22, we expect this segment to contribute a higher revenue to the group,” he says.

Kang owns an equity of 4.14% directly and 7.7% indirectly in EG Industries. He has been consistently acquiring shares since March 2021, adding about 19 million shares in the nine-month period.

Looking ahead, Kang says EG Industries is increasingly tapping into the 5G scene, as it sees growing opportunities in the box-build consumer electronics and telecommunications products.

“We are moving very quickly into the high-technology sector by playing a vital role in the 5G space for a customer. In addition, we also continue to seek for new opportunities within the industry and vie for new customers as the global economy reopens.

“We are in talks to secure new customers within our industries such as consumer electronics, medical and automotive sectors,” says Kang.

Apart from 5G-related products, EG Industries’ catalysts for an improved financial performance are also from the box-build and data storage segments. To date, the group has secured a number of new box-build customers and it foresees the revenue from this segment to continue increasing.

“As for data storage, we continue to see a stable and strong demand due to the current technology and the trend of working from home arising from the pandemic.

The majority of EG Industries’ clientele are international players in two main segments, namely, data storage and consumer electronics. For some clients, EG Industries acts as an original equipment manufacturer (OEM) by producing products as per customers’ specifications.

“There have been instances where we take on the original design manufacturer (ODM) role and propose new innovations for their products to differentiate them even more in the market,” says Kang.

As the group works to secure more orders from sectors such as consumer electronics, medical and automotive, especially in the form of higher-margin products, it is in the midst of increasing its production capacity by 30% by 2023.

EG Industries is currently constructing its second fully-automated facility with an allocated capital expenditure of RM15mil. Upon completion in 2023, the group’s total production space will increase to 85,000 square metres from 55,000 square metres currently.

“The new factory’s strategic location in Penang also complements our current Sungai Petani plants, and enables us to strengthen our presence and recognition among multinational companies.

“This provides us the opportunity to derive operational benefits from an advanced supply chain alongside a good transportation network,” Kang says.

EG Industries started its FY22 on a weak footing, as net profit and revenue dropped by 56.3% and 32.8% year-on-year respectively, in the first quarter ended Sept 30. This was due to operational disruptions as production capacity was limited at 60%, following the Covid-19 restrictions.

However, since October 2021, EG Industries’ production capacity has gone back to the pre-pandemic level of 80%. Kang expects the production capacity to be increased further to about 85% in the coming quarters.

The increase in operational capacity to 80% currently has allowed EG Industries to fulfil some of the delayed orders for existing products such as PCBA and box-build products.

In addition, the group is also able to undertake deliveries of new current orders for box-build products. “We expect an enhanced second quarter of FY22,” says Kang.

Barring unforeseen circumstances, Kang expects a stronger financial year ahead, although this is subject to the government’s movement control order implementation and supply chain disruption.

“The situation is very volatile and we are certainly doing our best to contain its impact. Even so, our expansion plan is the way forward. We have fixed costs for labour and overheads, but we are constantly monitoring it.

“That is why enhancing operational automation is our key focus, as demonstrated with the completion of our new smart manufacturing plant in October 2019,” he says.

When asked whether EG Industries may benefit from Dyson cutting its ties with ATA IMS Bhd, Kang hinted about such a possibility.

“We are actively expanding our services and solutions to all our existing customers, should there be new opportunities in the future.”

Following the forced labour claims involving ATA IMS, British consumer electronics company Dyson has sent notices of contract termination to the former. The effective date of termination will be on June 1, 2022.

Analysts are expecting other domestic EMS players to benefit from the termination, as the orders could be potentially diverted to ATA IMS’ competitors.

“In any case, we do not face similar labour issues in EG Industries. If you look at our workforce, 70% of our production workers are locals, including from the surrounding Sg Petani vicinity, and foreign workers make up the rest. This is where we are different from other local EMS players,” says Kang.

A quick check on EG Industries’ balance sheet shows the group was sitting on total borrowings of RM235mil as of Sept 30, against cash and cash equivalents of RM30.5mil.

Almost 90% of the debt is denominated in US dollars, thus raising concerns about the impact on EG Industrial’s financials in the event the ringgit weakens further.

“Our debt is in US dollars because most of our revenues are denominated in US dollars by virtue of serving international customers. It is therefore a natural hedge for us,” according to Kang. He adds that the group’s borrowings are mainly short term in nature for working capital to support its billion-ringgit revenue base.

“In FY21, we managed to bring our borrowings down with prudent financial policy and the utilisation of proceeds of RM7mil from a private placement completed on Jan 7, 2021. This resulted in a lower gearing level of 0.62 times – a comfortable level for us,” says Kang.

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