THE latest listed company to jump on the electronic manufacturing services (EMS) bandwagon is loss-making chicken egg producer LTKM Bhd.

       The company has become subject to a reverse takeover by an EMS player called Local Assembly Sdn Bhd which is based in Gelang Patah, Johor.

       Local Assembly was set up in 2000 and manufactures electronic, electrical and plastic injection moulded components and its main business comes from three multinational firms located in Singapore and Malaysia.

       The question is, is LTKM getting into the game too late?

       EMS stocks were all the rage not too long ago.

       Stocks like VS Industry Bhd and SKP Resources Bhd had hit record highs from mid-2020 to late 2021.

       However a combination of plant shutdowns due to the Covid-19 pandemic, labour shortages and supply chain disruptions has turned some investors away from EMS stocks.

       Tech stocks are also going out of favour globally, with the Nasdaq composite index down some 16% year to date.

       Concerns over higher interest rates and rising inflation have nudged some investors to drop more risky assets, such as tech stocks.

       There are also environmental, social, and governance issues in the EMS sector, with concerns of labour issues running foul of international standards and potentially driving away multinational clients.

       LTKM is proposing to acquire 100% of Local Assemby at a price of RM336mil, to be paid by RM100mil in cash and 393.33 million new LTKM shares at an issue price of 60 sen each.

       On a positive note, Local Assembly has reported some impressive numbers.

       Its revenue grew from RM65.6mil in its financial year ended Dec 31, 2019 (FY19) to RM78.9mil in FY20, and to RM116.35mil in FY21.

       Profit after tax grew from RM7.9mil in FY19, to RM14.2mil in FY20, and to RM20.06mil in FY21.

       The company has no debt and enjoyed a net profit margin of 17.2% in FY21.

       The co-founders of Local Assembly, Chai Voon Sun, Gurmakh Singh Ajmer Singh and Wee Thian Song, who will become the controlling shareholders of LTKM, have provided profit guarantees under the proposed acquisition.

       The profit guarantee entails a minimum profit after tax of RM28mil for FY22 or not less than a combined RM50mil profit after tax for both FY22 and FY23.

       In terms of valuation, Local Assembly is being acquired at a price-to-earnings (PE)ratio of 16.8 times its FY21 profit after tax.

       Taking into account the profit guarantee, the valuation of Local Assembly works out to 13.4 times based on the average profit after tax of RM25mil, according to LTKM’s filing.

       Top EMS players VS Industry Bhd and SKP Resources Bhd trade at historical PEs of 15 times currently.

       Hence the deal seems to be benchmarked on these companies, although it isn’t clear if Local Assembly is as advanced as VS and SKP, in terms of its technological patents and innovative processes.

       LTKM have yet to reply to questions from StarBizWeek.

       Interestingly, a known corporate personality is in the picture as a shareholder of Local Assembly.

       Datuk Seri Chiau Beng Teik and his son Chiau Haw Choon own 20% of Local Assembly and will end up with a stake in LTKM following the reverse takeover.

       Chaiu and his son are known as the owners of Chin Hin Group Property Bhd.

       There were also pre-initial public offering investors in solar energy solution provider Solarvest Holdings Bhd that listed on the ACE Market in November 2019.

       To recap, other aspects of the corporate exercise being proposed by LTKM entails the major shareholder buying back the loss-making egg business from the listed company, a capital repayment to LTKM shareholders of RM1.11 per share (which will finance the major owner in buying back the egg business) and a restricted offer for sale of 230 million LTKM shares at 60 sen a piece to raise some RM138mil.

       There will also be a consolidation of two existing LTKM shares into one share.

       The company’s name will be changed to LA Technology Bhd.

       LTKM’s shares closed at RM1.40 yesterday, giving it a market capitalisation of RM200mil.

       LTKM executive chairman Datuk Tan Kok and his family have indicated that they would step down as directors of LTKM upon the completion of the proposals, to concentrate on managing the poultry business.

       He said the proposed disposal came amid a challenging operating landscape that has impacted the company’s ability to pay dividends over the past two financial years.

       The challenges to the poultry industry, he said, included overcapacity, lower average selling price of eggs, high raw material prices and difficulty in controlling disease outbreaks.

       “At its core, the proposals seek to reward our shareholders from the proceeds of the disposal of the company’s existing poultry business while at the same time, allow them to continue participating in the new EMS business,” he said.

       In a filing with Bursa Malaysia, based on a study by Protege Associates Sdn Bhd, LTKM pointed out that the EMS market in Malaysia is expected to continue to expand, supported by the increasing adoption of electronic content and an established electronics cluster in Malaysia providing a sizable and ready end-user market.

       However, the study also noted that on the flip side, the short-term purchase commitment from customers as well as reduced lead-time in orders may pose a challenge to EMS players due to the uncertainty in the volume and timing of sales, leading to EMS market players being unable to maximise the use of manufacturing capacities.

       The study said moving forward, exports of electrical and electronics products are expected to continue growing from an estimated RM499bil in 2022 to RM685.2bil in 2026 at a compounded annual growth rate of 8.5%.