FoundPac gears up to tap automotive sector

TheEdge Wed, Jun 02, 2021 02:00pm - 2 years View Original


ESTABLISHED in 2004, Penang-based FoundPac Group Bhd has built a name for itself as a precision engineering firm specialising in serving the international semiconductor sector.

It is now ready to penetrate the automotive industry as it seeks to grow and diversify its customer base, says CEO and executive director Ong Choon Heng.

“We plan to supply high-precision critical parts to auto manufacturers. Our products will be low-volume, high-value items such as steering systems and gear systems,” Ong, 45, tells The Edge in a telephone interview. Ong joined the board of FoundPac as executive director and chief financial officer in 2016 before assuming his current role in February 2019.

He notes that FoundPac has been selected as an approved vendor for a key auto assembler in Malaysia. It is now eyeing the International Automotive Task Force (IATF) 16949 certification. “Hopefully, we can get the certification by August, and then we can start negotiating projects with [the auto assembler].”

The group will not incur major capital expenditure in its effort to diversify its customer portfolio, as it will leverage its existing production facility in Penang to produce the critical parts for the potential customer.

Ong says precision engineering will remain the group’s bread and butter. “We will always focus on what we do best, that is, precision engineering. Over the years, we have been focusing on serving the semiconductor industry, but going forward, we will diversify our product range and customer base to include the auto industry.”

FoundPac is a design house and manufacturer of high-performance test sockets and stiffeners. Its main clients include multinational semiconductor manufacturers, outsourced semiconductor assembly and test companies and printed circuit board design houses. Non-independent non-executive director Lee Chun Wah is currently the company’s largest shareholder, with a 39.78% stake.

But FoundPac is no stranger to the auto industry, considering that some of its existing indirect clients are also involved in the auto business, where its test sockets are being used to test automotive light-emitting diodes.

Ong hopes the auto segment will make a meaningful contribution of 10% to 20% to the group’s bottom line from the financial year ending June 30, 2023 (FY2023). Foundpac generated a net profit of RM16.06 million on revenue of RM51.05 million in FY2020.

Worst is over

Notably, the Main Market-listed firm experienced a significant drop in profits in FY2017 and FY2018, owing mainly to the impact of the merger of Broadcom Ltd, which was Foundpac’s largest customer. Following its merger with Avago Technologies Ltd in 2016, Broadcom reduced its purchasing activities, which affected FoundPac’s sales.

Since then, FoundPac has been diversifying and expanding its customer base. As a result, the group saw an improvement in its financial performance in FY2019 and FY2020.

In the cumulative nine months ended March 31, 2021 (9MFY2021), FoundPac saw its net profit decline 29.5% to RM8.34 million, compared with RM11.84 million a year ago.

Ong concedes that FoundPac’s financial performance in 1HFY2021 was not on a par with other Bursa Malaysia-listed semiconductor-related companies. He attributes this to the R&D expenditure behaviour of its customers for its test socket and stiffener businesses, which has turned cautious following the Covid-19 outbreak, especially between last July and December.

“The majority of our customers are mainly involved in front-end R&D. We concentrate on high-mix, low-volume (HMLV) manufacturing. Currently, 50% to 60% of our clientele is made up of the front-end users focusing on R&D,” he says.

While his team is still busy with ongoing projects, Ong admits that when these projects translate into actual sales volume, the quantity may be less.

“For instance, a customer may initially order eight test sockets from us to kick-start a project but, in the end, they only need four to five. So, in terms of sales value, it could probably drop from US$20,000 to US$10,000.

“However, our costs are very much fixed. As you can see from our depreciation and staff costs, there is almost no fluctuation. That is why when our top line drops, our bottom line will be significantly affected,” he says.

Owing to the travel restrictions amid the pandemic, Ong has not been able to find out the reasons for the change in customers’ spending behaviour. “Of course, we had virtual meetings and all that, but these meetings were very formal, so it was very difficult to find out why they did not spend on R&D as much as they did in the previous years. Even today, we are not really sure why they reduced their R&D expenditure in 1HFY2021.”

On a positive note, he says the spending behaviour of FoundPac’s customers seem to be back to normal this year, and thus he is hopeful that the group’s financial performance in 2HFY2021 will improve.

“Things are starting to gradually come back this year. Our 3QFY2021 was better on a quarter-on-quarter basis. Again, we have many projects in hand, so we are not too worried about the slowdown. Our engineers are handling and delivering new projects continuously. Basically, we are still handling the same workload, but it is just that when it translates into dollars and cents, the numbers don’t look fantastic,” he says.

Shares in FoundPac have dropped 20% year to date (YTD) to close at 75 sen last Thursday, giving the company a market capitalisation of RM404.17 million. The counter is currently trading at a trailing 12-month price-earnings ratio (PER) of 32 times.

In comparison, its closest listed peer JF Technology Bhd is trading at a historical PER of 78 times. The stock has declined 7.5% YTD, to settle at RM1.23 last Thursday, valuing the group at RM1.14 billion.

Ong says FoundPac’s growth story is consistently slow and steady, as it concentrates on serving its front-end customers that are focusing on R&D.

“You probably won’t see a dramatic jump in our share price, but you may see significant improvement in our earnings. That’s because our costs are fixed and we undertake only projects that could give us good profit margins. So, all we need is a strong recovery in revenue,” he adds.

Although the semiconductor back-end players need more test sockets and stiffeners, Ong insists that FoundPac will not be distracted by the recent short-term hiccup. “Yes, we suffered a little bit in 1HFY2021, but our long-term strategy of focusing on HMLV and serving front-end customers will not change. We will not reduce our exposure to the front-end and shift our focus to back-end.”

 

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