CGS-CIMB Research analyst William Tng has kept “add” on Grand Venture Technology (GVT) following its two new acquisitions in December 2021.
“We are positive on these acquisitions as they add production capacity and allow growth with new customers and penetration into new industries,” writes Tng in a Jan 4 report.
“We expect further mergers and acquisitions (M&A) and potentially further capacity expansion in FY2022. Our FY2022 and FY2023 earnings per share (EPS) are raised by 4.0% and 5.0% respectively as we factor in contributions from J-Dragon. For now, we do not assume any earnings impact from the Formach acquisition,” he adds.
The company acquired a 100% stake in Malaysia-based sheet metal manufacturer Formach Asia for $7.8 million.
“This acquisition adds front-end semicon customers and production capacity (Formach has a 90,000 sq. ft. plant in Johor, Malaysia as at December 2021 to GVT. GVT paid a historical price-to-book value or P/BV of 1.40 times for Formach (based on end-June 2021 book value),” writes Tng.
The company also acquired a 100% stake in J-Dragon Tech (Suzhou) for $12.2 million.
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J-Dragon manufactures and undertakes research and development (R&D) on parts, modules and tooling for the aerospace, medical and semiconductor segments.
“We believe, this acquisition will help GVT grow its medical business segment and enables the group to enter the aerospace industry. J-Dragon was valued at a historical P/BV of 1.90x (end-June 2021 book value) by GVT,” says Tng.
“On an annualised basis, the acquisition P/E multiple was 5.61 times FY2021 earnings. J-Dragon has a 53,800 sq ft. plant located in Suzhou, China as at December 2021,” he adds.
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On the higher target price, Tng explains that the previous valuation was done using the Gordon-Growth method (at 4.49 times FY2022 BV/share of 37.6 cents).
“Given the company’s execution of its growth plans, we switch to a P/E valuation to better capture its growth profile. We now value GVT at 15.8 times FY2023F EPS for a higher target price of $1.74,” says Tng.
“Our target P/E factors in a 10.0% discount to the sector average P/E of 17.5 times, given GVT’s smaller market cap,” he continues.
To this end, Tng has identified downside risks as operational disruptions such as workers being infected by Covid-19, or power restrictions in its China plant. On the other hand, re-rating catalysts are stronger-than-expected results, potential new customer wins and more accretive M&A.
Shares in GVT closed flat at $1.19, or 3.91 times FY2021 P/B and dividend yield of 0.90%.
Photo: Albert Chua/The Edge Singapore
