UMW HOLDINGS BHD (RM5.45 as at Oct 30)

IT has entered into a joint venture and shareholders’ agreement with Titanium Assets Holdings Sdn Bhd, R. Remakantan Ramachandran and Mohan Krishna Kunanayagam to acquire 60% of Coldfusion Engineering Sdn Bhd (CFE) for RM5.9mil cash. Remakantan and Mohan are the CEO and Chief Technology Officer of CFE respectively, who will provide the technological skills and expertise.

Comment by ECM LIBRA: CFE provides complete turnkey solutions from design to manufacturing of Low Temperature Co-Fired Ceramic (LTCC) and Thick Film Technology (TFT) products for the electronics industry.

LTCC is a multi-layer technology used in semiconductor packaging to produce multilayer hybrid integrated circuits (IC), while TFT is often used as the interconnecting medium for hybrid ICs. LTCC products are used in various industries including communications, medical and IT.

CFE’s key services include Printed Circuit Board (PCB) layout, power circuit design, fabrication, assembly and full box build. The company had been awarded a R&D grant of RM6.2mil by Malaysian Industrial Development Authority (MIDA), and expects its LTCC plant in Penang to commence production by end of next year.

The venture into the field of semiconductor appears to be a relatively new foray to UMW’s Manufacturing & Engineering (M&E) division due to the division’s experience being limited to the automotive and aviation industry.

The acquisition was made to expand the division, which is UMW’s smallest earnings contributor that has been lacking growth in the past 3 years.

However, UMW appears to be taking a cautious approach by making only a small initial investment to test the market potential of CFE’s services in the semiconductor industry.

Margins for the LTCC business range between 30% and 300%, while the global market is estimated at US$22bil, growing at a CAGR of 30%.

We understand from management that earnings contribution from this venture is likely to be small, and will not have a material impact to earnings in the next few years. The small size of the investment also indicates that earnings contribution to UMW’s bottom line to be minimal.

Recommendation: HOLD. We maintain our forecasts and sum-of-parts target price of RM6.10 at this juncture, due to minimal earnings impact from this acquisition.

WCT BHD (RM1.25 as at Oct 30)