Choosing between JF Technology and FoundPac

This article first appeared in The Edge Malaysia Weekly, on June 4, 2018 - June 10, 2018.
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INVESTORS in semiconductor and semiconductor-related companies listed on Bursa Malaysia were laughing all the way to the bank following a surge in share prices last year. The likes of Unisem (M) Bhd, Globetronics Technology Bhd, Inari Amertron Bhd and Malaysian Pacific Industries Bhd (MPI), as well as ViTrox Corp Bhd, Elsoft Research Bhd, Aemulus Holdings Bhd and MMS Ventures Bhd climbed at least 50% to as much as 290% in 2017.

Joining the tech stock rally, JF Technology Bhd and FoundPac Group Bhd, which design and manufacture high-performance test sockets and other materials for semiconductor giants, also saw their share prices gain 410% and 6% respectively last year.

Notably, with the ringgit strengthening against the US dollar in the first quarter, these export-oriented semiconductor and semiconductor-related firms have seen a weaker share price performance so far this year. For instance, Unisem, MPI and Globetronics have seen their share prices decline 37%, 22% and 16% respectively year to date.

Most, however, have rebounded or recovered slightly in recent weeks against the backdrop of a stronger US dollar since April, except for JF Technology and FoundPac, whose stock prices have halved since the start of the year.

Is this a good time for investors to buy into JF Technology and FoundPac, or at least put them on the bottom-fishing watch list?

JF Technology managing director and CEO Datuk Foong Wei Kuong tells The Edge that, despite a stronger ringgit in the first quarter of the year, the group is still showing growth, albeit marginally.

In the nine months ended March 31 (9MFY2018), JF Technology’s revenue grew 5% year on year to RM18.9 million, while net profit increased 3% y-o-y to RM4.33 million.

While Foong concedes that JF Technology’s share price is in correction territory, he is of the view that most shareholders are keeping their shares, considering the low volume traded. He attibutes the dip in share price to global sentiment. “Judging from our current performance, in spite of the challenging global scenario, we are still showing growth,” he says.

Foong adds that JF Technology’s exposure to the automotive sector is sizeable, and with the high adoption of integrated circuit (IC) devices in this sector, the company should be able to weather the challenges.

FoundPac CEO Lee Chun Wah says the company’s shares “may be undervalued”, but he notes that the fall in share price is entirely sentiment driven.

“We believe that with our strong fundamentals, the real value of the company will emerge in the share price in the long run,” he tells The Edge.

Despite higher revenue, FoundPac saw its net profit drop 21% to RM5.87 million y-o-y in 9MFY2018.

Lee says the impact of the stronger ringgit has already been felt in the first quarter this year. For 9MFY2018, total realised and unrealised foreign exchange loss came to RM627,000, compared to a forex gain of RM654,000 a year ago.


Closest peers, but not direct competitors

Penang-based FoundPac produces stiffeners and high-performance test sockets used by multinational semiconductor corporations, including fabless semiconductor firms, printed circuit board (PCB) design houses as well as companies in the outsourced semiconductor assembly and test (OSAT) industry.

As for JF Technology, the homegrown high-performance test contacting solutions provider manufactures and supplies test probes and test socket products for the semiconductor industry worldwide.

JF Technology is headquartered in Kota Damansara, Selangor, and its integrated facility is capable of producing 1,200 test sockets per month. Its customers include Unisem, Aemulus, Carsem (M) Sdn Bhd and SRM Integration (M) Sdn Bhd.

In the semiconductor testing process, OSAT companies need equipment to test integrated circuits (IC). For the tester to “communicate” with the IC, an interface comprising a PCB or test board is required.

But for the test board to dock inside the tester, a mechanical fixture — a stiffener — is needed to align the test board to the tester. Meanwhile, for the test board to “communicate” with the IC, a test socket is needed to hold the IC.

Despite the similarities in business activities, JF Technology’s historical price-earnings ratio (PER) of 20 times is significantly higher than FoundPac’s 12 times. In fact, at their peak last year, JF Technology was trading at a PER of more than 50 times, compared with FoundPac’s 28 times.

JF Technology’s Foong points out that the company and FoundPac are in different niche segments of test socket applications and the two companies very rarely cross paths.

“I would say FoundPac is not our competitor. We are not similar even though we are in the (same value chain). Application requirements divide us,” he says, adding that JF Technology is competing with US-based Johnstech International and Japan-based Rika Denshi Co Ltd in the test contacting market.

Meanwhile,  Lee says JF Technology is considered FoundPac’s closest competitor as both companies have a common product — test sockets. But that does not mean the two are direct competitors.

“As far as we know, we are using different technologies in producing test sockets. So far, we have not competed directly in exploring new market segments and securing new customers,” he says.

It has not gone unnoticed that JF Technology and FoundPac have strong net cash positions. As at March 31, JF Technology was sitting on a RM9 million cash pile while FoundPac had a war chest of RM37.5 million.

So, do they plan to declare more dividends to reward shareholders?

“Yes, we would like to reward our shareholders with higher dividends when the signs are clear. We are mindful of the pending lawsuit,” says Foong.

To recap, Johnstech International filed a patent infringement lawsuit against JF Technology in June 2014, involving JF Tech’s test socket product called Zigma.

Over the past 12 months, FoundPac’s dividend yield of 3.3% was higher than JF Technology’s, which offered only 1.7%.

FoundPac’s Lee says the company has adopted a dividend policy of distributing at least 30% of its annual audited net profit to shareholders.

“However, the dividend distribution also depends on various factors such as the cash flow requirements for operations and capital expenditure, the availability of adequate distribution reserves and our financial performance,” he says.

JF Technology and FoundPac had comparable profit margins at about 25% to 30% in FY2017.

Lee attribute this to a higher margin for FoundPac’s products, as well as effective business process optimisation through lean implementation across all operations in the organisation.

Foong says most of JF Technology’s products are intellectual property protected.

“We are in a niche market of recurring sales of test consumables and we are at the forefront of technology, working very closely with design houses at the start of new IC development,” he says.

Going forward, says Foong, JF Technology remains optimistic for FY2019, with a focus on key market development with positive results seen for new product introduction and adoption.

“The prospects are bright for the industry because the automotive sector and Internet of Things are showing growth,” says Foong.

Meanwhile, Lee expects a challenging year ahead in FY2018, but hopes that results will improve in FY2019.

“The global electronic and semiconductor industry is expected continue to grow next year. We hope FY2019 will be a better year for us with the continuing growth of new products and projects,” he says.


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