KUALA LUMPUR : SAM Engineering & Equipment (M) Bhd's (SAM) proposed acquisition of Aviatron (M) Sdn Bhd from its holding company, leaves much to be desired given Aviatron's over reliance on one customer and the lack of a profit guarantee by the seller.
On Monday, SAM announced that it proposes to take over Aviatron, a manufacturer of aircraft structure parts and precision and engineering components, from Singapore Aerospace Manufacturing Pte Ltd (SAMPL) for US$43.4 million.
According to Hong Leong Investment Bank Research (HLIB Research), a single customer contributed more than 85 per cent of Aviatron's revenue in FY21-23.
Aviatron's principal products are nacelle beams, which are used in Boeing and Airbus aircrafts, for the US and Mexico markets.
SAMPL also did not provide a profit guarantee for the transaction, despite the high price to earnings valuation based on financial year 2023 earnings.
HLIB Research said it would have preferred SAM to increase its exposure in the semiconductor sector, especially in the front-end supply chain.
"While we think that SAM is a highly rare secular growth stock, we remain wary for the following reasons; the global semiconductor industry is going through a cycle of inventory correction; and we are seeing a considerable slowdown in demand for both data storage and consumer electronics segments globally," HLIB Research explained, in maintaining its hold call on the stock with an unchanged target price of RM4.76 a share.
It also highlighted that the group's Thailand expansion will take some time to break-even, despite narrowing losses in each subsequent quarter.
SAM proposes to undertake a renounceable right issue of 135 million new ordinary shares, on the basis of one rights share for every four existing SAM shares held, to finance the proposed acquisition, repay bank borrowings and defray expenses of the corporate exercises.
SAMPL, which owns 62.49 per cent of SAM has provided a written undertaking to take up its full entitlement of any remaining shares that are not subscribed, to ensure full subscription of the rights issue.
SAM will also repay outstanding advances from SAMPL to Aviatron of RM201 million, as of September 15, 2023, on behalf of Aviatron together with interest accrued.
SAMPL is an independently-managed Temasek Holdings (Private) Limited portfolio company.
SAM will need non-interested shareholder's approval to proceed with the related party transaction.
The company's share price was down 4.42 per cent to RM4.32 a share earlier.
