Mainstream
Broadcom a drag on FoundPac
Ho Chung Teng 
Almost half of the company’s sales come from US-based Broadcom
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Precision engineering parts fabricator and supplier FoundPac Group Bhd, which has been Broadcom Ltd’s supplier for about 12 years, is highly dependent on the US-based semiconductor giant, with almost half of its sales coming from the latter.

This strong relationship has served FoundPac well as it is able to sell at a good gross profit margin of above 40% on average.

However, when Broadcom slowed its purchases following its merger with Singapore-based Avago Technologies Ltd in 2016, FoundPac’s sales declined.

In the financial year ended June 30, 2017, FoundPac’s sales to Broadcom declined by 75.31% year-on-year to RM5.19 mil. In FY16, Broadcom had contributed 47.7% or RM21.04 mil to the company’s total revenue.

Despite the poor financial results, the counter was relatively unscathed. In fact, the share price closed slightly higher after the FY17 results announcement on Aug 15 last year.

The share price continued to hover above 50 sen but started its decline in January after completing its bonus issue on Dec 19. It had also announced in September plans to take a 75% stake in Dynamic Stencil Sdn Bhd (DSSB) for RM16.5 mil, a deal that comes with an aggregate guaranteed profit of RM9 mil for two financial years.

The counter reached a 52-week low of 33.5 sen in intra-day trading on Feb 8 from a high of 66.8 sen (adjusted for bonus issue) on May 22, 2017.

Its executive director and chief financial officer Ong Choon Heng says the price movements depend on the market. “However, we believe that a company with strong fundamentals will be able to get investors’ confidence,” he tells FocusM.

Ong says FoundPac is confident it can retain its premium pricing despite challenges in the semiconductor sector

He adds that FoundPac, which was listed on Dec 29, 2016, is confident it will be able to retain its premium pricing policy despite the challenges in the semiconductor sector. In addition, the company is also expected to secure the RM9 mil guaranteed profit for two financial years.

Ong is also unperturbed about the declining sales to Broadcom although they could still be unpredictable. “FoundPac will benefit if Broadcom has more active projects,” he says.

Despite the uncertainties, there is a silver lining as Broadcom opened its RM59 mil global distribution warehouse in Penang in September last year.

With the new facility, Ong says the company has seen more sales to Broadcom Malaysia in the last reporting quarter. For Q1FY18, revenue from Malaysia increased to RM2.98 mil from RM378,000 a year ago.

However, a fund manager says while FoundPac has relatively strong fundamentals, the reorganisation of Broadcom’s operations may not be positive for FoundPac.

“Broadcom’s decision to relocate its operations to the US as well as creating a local distribution centre may not benefit local suppliers such as FoundPac,” the fund manager explains.

 

Keep up with technology

He says FoundPac may find it tough to catch up with the improved technology introduced by Broadcom.

He adds that the presence of the local distribution centre will also result in local suppliers not being able to benefit from possible foreign exchange gains.

“Multinational companies such as Broadcom open local distribution centres to acquire products in local currencies in an attempt to hedge against fluctuating foreign currencies,” the fund manager explains.

However, he does not expect Broadcom to immediately stop purchasing from local suppliers. “It will continue to purchase from them to maintain the good relationship,” he adds.

Fund managers believe the decline in FoundPac’s share price is largely due to share disposals by the company’s second-largest shareholder Andrew Su Meng Kit via Acme Sky Sdn Bhd. He is the vice-president of TA Securities Holdings Bhd as well as a director of several listed companies.

Su sold 5.52 million FoundPac shares between Jan 2 and 4. He also disposed of 1.86 million shares on Jan 5, reducing his interest to 31.05 million shares or a 5.99% stake. Acme Sky emerged as a substantial shareholder in FoundPac on Sept 14 last year with 33 million shares, or a 8.92% stake, before the completion of a two-for-five bonus issue in December. As of Jan 16, Acme Sky had ceased to be a substantial shareholder.

A fund manager says investors expect the company to announce lower-than-expected profits on the back of weaker fundamentals.

He says investors are also shying away from semiconductor-related counters, which had rallied in the past months with several of them aleady reaching their market value.

While the RM9 mil guaranteed profit could boost FoundPac’s earnings, there are concerns about whether the profit figure can be achieved.

On Sept 25, Bursa Malaysia asked FoundPac to clarify and justify the achievability and sustainability of the RM9 mil guaranteed profits (RM4.5 mil a year), given DSSB’s net profit for the financial year ended May 31, 2017 was only RM1.89 mil.

FoundPac explained that the guaranteed profit is achievable and reasonable, as based on DSSB’s accounts for the three months ended Aug 31, 2017, the revenue and net profit stood at RM2.39 mil and RM770,000 respectively. DSSB had an average net profit margin of 23.5% for the past three years.

“The board is confident that the aggregate guaranteed profits can be achieved based on the expected growth in sales in DSSB in the coming months, taking into consideration the increase in sales on a month-to-month basis and with new customers being secured,” FoundPac added.

 

Double-digit growth in revenue

Ong is confident that the company can achieve double-digit growth in revenue in FY18. “We are still positive on the outlook for the test socket market. For Q1FY18, we achieved double-digit growth in revenue compared with Q1FY17. We need to work on it for the other quarters in FY18 to maintain the target,” he adds.

He says FoundPac’s move to concentrate on products with high profit margin, such as test sockets, will enable it to achieve its growth target.

On the other hand, FoundPac’s premium pricing strategy is not seen as sustainable as its gross profit margin has declined. For Q1FY18, the gross profit margin declined to 42.35% from 43.82% in FY17 and 47.06% in FY16.

Ong explains that the decline in gross profit margin in the recent quarters was basically due to revenue from different product mix.

For Q1FY18, FoundPac’s net profit rose marginally to RM2.33 mil from RM2.24 mil a year ago on the back of a 15.15% increase in revenue to RM9.39 mil from RM8.15 mil.

FoundPac’s executive director and CEO Lee Chun Wah had earlier said its premium pricing policy is unchanged given its long-established relationship with Broadcom, as well as its quality products and services.

“We strongly believe in the products and services we’ve got to offer. The price that our customers pay (begets) the top level of quality that they deserve,” Lee had said.

FoundPac is involved in the development, manufacturing and retailing of precision engineering parts such as stiffeners, test sockets and hand lids for semiconductor manufacturers and outsourced semiconductor assembly and test companies. Its products are also used by printed circuit board design houses and fabless semiconductor companies.



This article first appeared in Focus Malaysia Issue 271.