ESTABLISHED in 2004, Penang-based FoundPac Group Bhd has made a name for itself as a precision engineering company specializing in serving the international semiconductor industry.
It is now poised to enter the auto industry as it seeks to develop and diversify its customer base, said CEO and Executive Director Ong Choon Heng.
“We plan to supply high precision critical parts to vehicle manufacturers. Our products will be low volume, high value items such as steering systems and gear systems, ”Ong, 45, told The Edge in a telephone interview. Ong joined the FoundPac Board of Directors as Executive Director and CFO in 2016 before assuming his current role in February 2019.
He notes that FoundPac has been selected as an approved supplier for a major automotive assembler in Malaysia. She is now aiming for IATF (International Automotive Task Force) 16949 certification. “I hope we can get the certification by August, then we can start negotiating projects with [the auto assembler]. “
The group will not incur major capital expenditures in its efforts to diversify its customer portfolio, as it will leverage its existing production facility in Penang to produce critical parts for the potential customer.
Ong says precision engineering will remain the bread and butter of the group. “We will always focus on what we do best, which is precision engineering. Over the years we have focused on serving the semiconductor industry, but in the future we will diversify our product line and customer base to include the automotive industry.
FoundPac is a design house and manufacturer of high performance test sleeves and stiffeners. Its main customers are multinational semiconductor manufacturers, outsourced semiconductor assembly and testing companies, and circuit board design houses. The non-independent non-executive director Lee Chun Wah is currently the largest shareholder in the company, with a 39.78% stake.
But FoundPac is no stranger to the automotive industry, as some of its existing indirect customers are also involved in the automotive industry, where its test sockets are used to test automotive light emitting diodes.
Ong expects the automotive segment to make a significant contribution of 10-20% to the group’s net income from the fiscal year ending June 30, 2023 (fiscal 2023). Foundpac generated net profit of RM16.06 million on turnover of RM 51.05 million in fiscal year 2020.
The worst is over
Notably, the main market-listed company experienced a significant drop in profits in fiscal 2017 and 2018, mainly due 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 activity, which affected FoundPac sales.
Since then, FoundPac has diversified and expanded its customer base. As a result, the group experienced an improvement in its financial performance during fiscal years 2019 and 2020.
In the cumulative nine months ended March 31, 2021 (9MFY2021), FoundPac saw its net profit decline 29.5% to RM 8.34 million from RM 11.84 million a year ago.
Ong concedes that FoundPac’s financial performance in 1HFY2021 was not comparable to that of other semiconductor related companies listed on Bursa Malaysia. He attributes this to the behavior of its customers’ R&D spending for its test sockets and stiffeners activities, which have become cautious following the Covid-19 epidemic, especially between July and December last.
“The majority of our clients are mainly involved in front-end R&D. We focus on High Mix Low Volume (HMLV) manufacturing. Currently 50-60% of our customer base is front-end users focusing on R&D, ”he says.
While her team is always busy with ongoing projects, Ong admits that when those projects result in actual sales volume, the quantity may be less.
“For example, a customer might initially order eight test sockets from us to start a project, but ultimately 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 fixed. As you can see from our depreciation and personnel costs, there is virtually no fluctuation. This is why when our turnover drops, our bottom line will be significantly affected, ”he said.
Due to travel restrictions amid the pandemic, Ong has not been able to uncover the reasons for the change in customer spending behavior. “Of course we had virtual meetings and all that, but those meetings were very formal, so it was very difficult to know why they hadn’t spent as much on R&D as in previous years. Even today, we don’t really know why they cut their R&D spending in 1HFY2021. “
On a positive note, he says that the buying behavior of FoundPac customers appears to have returned to normal this year, so he hopes the group’s financial performance in 2HFY2021 will improve.
“Things are starting to gradually come back this year. Our 3QFY2021 was better on a quarterly basis. Again, we have a lot of projects on hand, so we’re not too worried about the slowdown. Our engineers continuously manage and deliver new projects. Basically we’re still handling the same workload, but it’s just that when that translates into dollars and cents, the numbers don’t look fantastic, ”he says.
FoundPac shares fell 20% year-to-date (YTD) to close at 75 sen last Thursday, giving the company a market cap of RM404.17 million. The meter is currently trading at a 12-month rolling price / earnings ratio (PER) of 32 times.
By comparison, its closest listed counterpart, JF Technology Bhd, is trading at a historic PER of 78 times. The stock is down 7.5% year-to-date, to settle at RM 1.23 last Thursday, valuing the group at RM 1.14 billion.
Ong says the story of FoundPac’s growth is always slow and steady, as it focuses on serving its front-end customers who focus on R&D.
“You probably won’t see a dramatic jump in our share price, but you could see a significant improvement in our earnings. This is because our costs are fixed and we only undertake projects that could give us good profit margins. So all we need is a strong revenue recovery, ”he adds.
While major semiconductor players need more test sockets and stiffeners, Ong insists FoundPac won’t be distracted by the recent short-term hiccups. “Yes, we suffered a 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 we will not focus on the back end. “