3REN Berhad - Comprehensive Automation Solutions Service Provider
Fri, 18-Oct-2024 07:44 am
by Team Coverage • Apex Research

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3REN (0328)

Target Price (RM)

0.42

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Summary

3REN's long-term relationship with multinational companies like Intel and KellyOCG, collectively contributing more 60% to total revenue over the past three years is a testament to the Group’s ability to undertake and retain large MNC customers.

Future growth will be supported by strong client base with 62.9% recurring multinational customers, alongside with geographical expansion in bid to capture additional market share that is riding onto the growing demand and technology evolution.

3REN is valued by pegging its FY25F core EPS of 2.1 sen to PE multiple of 20.0x, leading to a FV of RM0.42 (50.0% potential upside from IPO price).

 

Investment Highlights

  • Growing demand for automation solutions. With Industry 4.0 and 5.0 gaining momentum globally, demand for automation solutions in the semiconductor sector is rising. 3REN’s expertise in this domain positions the Group well to capture market share.

  • Comprehensive service offering. The Group provides a wide range of engineering services, including IC assembly and testing, product engineering, digitalised solutions, and automated equipment. This diverse portfolio positions 3REN as a one-stop solution provider, fostering customer loyalty and facilitating cross-selling opportunities among its various service lines.

  • Secured projects from wide range of customers mostly comprising multinational companies. The Group secure projects primarily from multinational clients, including Intel cumulatively for 13+ years, KellyOCG 7+ years and new clients like Customer D and E, acquired in 2023. The Group ability to retain 62.9% recurring customers among 89 total clients in 2023 highlights their service quality and industry track record. This strong portfolio of multinational and established local customers positions the Group to further expand.

  • Geopolitical expansion and market penetration strategy. The Group is set to open a marketing and sales office in Singapore by 1H25, aiming to bolster its market presence and strengthen its sales and marketing initiatives. Having already secured orders from Singapore-based clients, the new office will provide direct sales support to existing customers and facilitate closer engagement with potential clients. This strategic base will also serve as a springboard for the Group's expansion into other international markets, increasing exposure to a broader pool of multinational companies and enhancing its corporate profile. The Group plans to allocate RM3.0m from the public issue proceeds to fully fund the establishment and working capital requirements for the Singapore office.

  • Establishment of delivery centres. The Group intends to establish dedicated Delivery Centres to manage specific product engineering services, typically performed at various customer locations, while ensuring compliance with clients' security requirements. Each centre will include secure design spaces with controlled access and independent network infrastructure, allowing for the safe use of proprietary tools and software. The first Delivery Centre will cater to the Intel group, and is expected to begin operations in the 2Q24. The second centre, aimed at prospective clients, is scheduled to launch by the 4Q25. RM7.2m financed through public issue proceeds over 36 months to cover staffing, rental, renovation, equipment, and operating expenses. 

     

Valuation & Recommendation

  • At an IPO offer price of RM0.28, 3REN’s forward PE valuation for FY24F/FY25F/FY26F is touted to be undemanding at 14.3x/13.9x/12.8x, which is far below Bursa Malaysia’s Technology sector that is trading at 38.0x. We arrived at our fair value of RM0.42 (50.0% potential upside from its IPO price) by assigning a target PE of 20.0x to its FY25F EPS of 2.1 sen.

  • The assigned target PE represents approximately 25.0% discount to selected peers that involves in provision of engineering support services for IC assembly and testing such as OPPSTAR as well as peers involve in provision of design and development of digitised solutions and automated equipment such as TVHB, GENETEC and PENTA that are trading at an average forward PE of 27.4x for 2025F. The discount is to reflect 3REN’s smaller market cap.

  • We like 3REN for its established position that commands a market share of 0.3% in the automated manufacturing and digitalisation solution based on total revenue combined from automated equipment and digitalised solution of RM36.5m recorded in FY23 alongside with stable growth prospects riding onto technology advancements and evolutions and aiming to boost their presence in the regional markets.

  • While 3REN does not adopt a formal dividend policy, we note that the Group was at net operating cash flow over the years. We reckon that the rolling out of expansion plans would be their key focus over the next 18 months.

     

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