KUALA LUMPUR: Maybank Investment Bank Bhd (Maybank IB) is neutral on Globetronics Technology Bhd's latest technology provision agreement with Kaynes Technology India Ltd's subsidiary Kaynes Semicon Private Ltd (KSPL).
Globetronics' wholly owned subsidiary, ISO Technology Sdn Bhd, had secured a contract worth US$7.59 million (RM35.90 million) to provide technical services related to outsourced semiconductor assembly and testing (OSAT).
As part of the deal, KSPL will pay ISO Technology a sum of US$7.6 million (RM35.9 million), of which US$5.3 million (RM25 million) will be reinvested by ISO Technology into compulsorily convertible preference shares (CCPS) issued by KSPL.
In return for the investment, Kaynes is required to provide ISO Technology with an exit opportunity either via an initial public offering (IPO) or a strategic sale within three years from ISO Technology's date of subscription to the CCPS.
"Despite effectively guaranteeing Globetronics a contribution of RM10.9 million over three years, we are less optimistic about the deal's' re-investment' portion.
"This is due to several factors, namely the inexperience of its counterpart in OSAT, the absence of established customers, as well as the uncertainties surrounding exit valuation guarantees," the investment bank said in a note.
Maybank IB has maintained a "sell" call on Globetronics, with a higher target price of RM1.37 from RM1.07.
According to Maybank IB, the deal, at best, ensures Globetronics a contribution of RM10.9 million, which will be recognised in installments over a three-year period.
"Additionally, it is understood that the exit value of RM25 million for its 're-investment' is not guaranteed at this point, should Kaynes fail to spin-off KSPL by the specified deadline post-CCPS subscription.
"Moreover, the CCPS is expected to represent only a negligible percentage, approximately two to three per cent, of KSPL's eventual equity value upon complete conversion," it added.
Kaynes is an end-to-end contract manufacturer for Internet of Things (IoT)-integrated electronics for a wide range of sectors.
Despite its 34 years of manufacturing experience and eight production plants, it does not have any prior OSAT experience.
It set up KSPL with the specific aim of being its India-based OSAT unit, and we understand it has no existing customers.
The "technical services" that Globetronics will render to KSPL include the setup and transfer of a single OSAT line for matured products, such as lower-margin small outline components and general-lighting LEDs.