March 23 – SET for a fivefold capacity expansion from a RM45 million investment by FY2024, precision machining group YBS International Bhd will soon be able to produce roughly RM200 million worth of electrical connectors and other high-precision products — more than double its current annual turnover.

The expansion of its manufacturing plant at the Penang Science Park is set to be completed this year, YBS managing director Jackie Yong Chan Cheah says.

“We bought a property in the Penang Science Park in 2019, where our current manufacturing plant is located. The property is a four-acre factory on a 10-acre tract. We decided to expand the factory to cover seven acres of the land last year.

“But because of the Movement Control Order (MCO), we managed to complete only one acre of the three-acre expansion last year. The expansion is expected to be completed this year. We have also budgeted for between RM5 million and RM6 million to buy new machines,” Yong tells The Edge in an interview last Wednesday (March 9).

If demand from customers exceeds expectations, YBS’s capital spending for machines could increase to RM10 million in FY2023 to further raise its manufacturing capacity. All in all, the group will be able to achieve RM200 million in revenue by the financial year ending March 31, 2024 (FY2024), he says.

Already, YBS’s contracts in hand could generate revenue of RM160 million to RM180 million “in a year”, says Yong, but the actual booking of revenue will depend on the purchase orders signed by its customers on a monthly basis.

YBS specialises in high-precision tools, metal, plastic components and sub-component assembly for various industries, primarily for high-end exacting applications in markets such as semiconductors, electrical and electronics, computer, telecommunications, automotive, medical and connector.

Over the last five financial years, YBS’s revenue ranged from RM63 million to RM76 million a year.

While the group has stayed in the black during that period, and its FY2022 earnings look set to reach new highs, thin margins have resulted in net profits being just a fraction of its top line.

Pre-tax margins have been inching higher from the trough of 1.52% in FY2020. In the nine-month period ended Dec 31, 2021 (9MFY2022), YBS’s RM4.35 million in profit before tax — from revenue of RM59.19 million — translates into a pre-tax margin of 7.35%, versus 2.9% in 9MFY2021.

“Our margins are increasing as we embark on higher-margin products and solutions, especially in the telecommunications sector. We have just started to produce precision parts for the telecom sector last year, after three years of pre-qualification,” says Yong.

In the telecom sector, YBS-made parts can be found in the high-speed connectivity devices and card storage of multinational companies (MNCs). Meanwhile, the group is also developing electrical connectors for the battery power management system in electric vehicles.

Yong believes these ventures will provide higher margins for the group. He says YBS’s pre-tax margins could increase to about 10% in the near future and believes the group will achieve a record profit in FY2022.

In FY2019, the group recorded RM2.72 million in net profit — its highest in the last five years. Its net profit in 9MFY2022 of RM3.4 million was up 289% year on year.

Apart from the Penang plant, YBS has plants in Johor, Vietnam and India, as well as sales companies in the US. The diversified locations meant that YBS was still able to produce when some of these locations were under various MCOs or lockdowns in 2020 and 2021.

Now that all of the locations are no longer under lockdown, YBS’s current capacity is fully utilised, says Yong.

YBS has benefited from the US-China trade war because US and other MNCs looked to suppliers outside of China for precision machining parts and other manufacturing products.

The expansion of the Penang plant has been done vis-à-vis demand from its customers, says Yong.

While YBS is not highly leveraged at the moment, its expansion plan will raise its gearing ratio from 0.5 times as at Dec 31, 2021, to 0.7 times, says Yong. “We are still comfortable with this gearing level, as our board has put a cap of 0.8 times on it.”

The expansion of its Penang plant and the purchase of machinery are funded mainly by a RM60 million credit facility provided by Malaysian Industrial Development Finance Bhd (MIDF), which carries much lower interest rates than facilities provided by commercial banks, says Yong.

Despite respectable profit growth y-o-y, as at 9MFY2022, YBS’s share price has declined 33.33% year to date. As at last Wednesday, YBS was trading at 48 sen, which values the group at RM121 million.

At 48 sen, YBS is valued at 25.91 times its trailing 12-month (TTM) earnings, which is rather pricey compared with its similar-sized peers Globaltec Formation Bhd, which is valued at 12.32 times TTM PER, and Wong Engineering Corp Bhd, which is valued at 14.32 times.

Over the last one year, YBS’s shares have rallied by 65.5%, from the opening price of 29 sen on March 9, 2021. The counter reached a peak of 78 sen nine months later on Dec 15, up 169% from its opening price on March 9.

While YBS’s valuation looks expensive at the moment, that could change if the group is able to quickly fill the additional capacity that it is building.

Yong is the largest shareholder in YBS, with a 14.6% stake, alongside his brother Yong Swee Chuan, through Indowang Sdn Bhd. The second-largest shareholder is Musharaka Tech Venture Sdn Bhd, with a 7.95% stake as at Feb 18.

YBS has a dividend policy of paying out up to half of its net profit. Yong says, however, that, as it is still in expansion mode, the group is unlikely to declare dividends anytime soon. Still, it has every intention to do so once its capital needs for expansion fall. Its capacity to pay would also increase if earnings margins continue to expand as it moves higher up the value chain.

Source : The Edge Markets