This article first appeared in The Edge Malaysia Weekly on October 30, 2017 - November 5, 2017

DENKO Industrial Corp Bhd is expected to benefit from the expansion of Dyson Ltd’s product line-up as executive chairman and controlling shareholder, Datuk Seri James Foo, injects Integrated Manufacturing Solutions Sdn Bhd (IMS) into the group.

This is because Foo, a Singaporean with extensive businesses in the electronic manufacturing services (EMS) industry in Johor, is close to the management of Dyson, says EMS industry officials.

“James is a very astute businessman and in the EMS circle in Johor, he is one of the best. Some claim that Dyson’s move to the state and its expansion has got to do with James,” says an industry veteran.

The exercise, seen as a reverse takeover of sorts, will see Denko acquire IMS for RM1.19 billion, to be satisfied via the issuance of 1.032 billion new ordinary shares in Denko at an issue price of RM1.15 each. This values IMS at 15 times its profit after tax (PAT) of RM79.13 million for the financial year ended March 31, 2017 (FY2017).

IMS did not respond to queries from The Edge.

So what is in IMS?

Filings with Bursa Malaysia are not explicit, but it is understood that Foo will be injecting two of his companies into Denko as subsidiaries of IMS — ATA Industrial (M) Sdn Bhd and Jabco Filter System Sdn Bhd, both based in Johor.

It is worth nothing that Companies Commission of Malaysia (SSM) records show both companies are owned by Foo, not IMS. ATA is held equally by Foo and Datuk Fong Chiu Wan. They each hold a 47.5% stake in Jabco, with the remaining 5% held by one Balachandran Govindasamy.

However, the IMS deal only involves Foo and Fong as the vendors. While IMS appears to be a dormant company, it is understood that ATA and Jabco will be injected into Denko via IMS.

Both companies have close ties with Dyson’s supply chain. ATA’s website lists Dyson as one of its major customers and says it runs full assembly lines for the electrical appliance maker’s global market needs. ATA is also the largest provider of HEPA (high efficiency particulate air) and non-HEPA filters for Dyson.

“When Dyson started its operations in Johor, ATA was only a subcontractor to Dyson. Now, it has become a main contractor,” says another industry official.

IMS and Denko are both in the plastic injection moulding business, serving the same category of customers in the electrical and electronic industry. The acquisition will grow Denko’s revenue and customer base and expand its production capacity.

Meanwhile, SSM data reveals that ATA is a sizeable company with revenue of RM1.72 billion and PAT of RM33.6 million for the financial year ended March 31, 2016 (FY2016). Jabco recorded a revenue of RM163.5 million and PAT of RM9.93 million the same year.

The announcement on the acquisition reveals that IMS recorded revenue of RM1.81 billion and PAT of RM79.13 million in FY2017. ATA’s and Jabco’s facilities are located near Denko’s in Senai.

On a par with the big boys

The acquisition of IMS will immediately make Denko one of the top three EMS players listed on Bursa Malaysia, alongside SKP Resources Bhd and VS Industry Bhd, says an industry observer with interest in one of the companies.

“After the deal, I think RM1.45 is already a fair price for Denko. Will the market give it a premium now that it is becoming one of the largest players? Will Denko overtake SKP to become the No 2 EMS player in Malaysia?” he asks.

In FY2017 ended March 31, SKP recorded a revenue of RM1.94 billion and a net profit of RM104.5 million. Meanwhile, Denko made a net loss of RM11.4 million during the financial year, on the back of RM101.6 million in revenue.

The losses were due to the impairment of trade debtor and fixed assets, amounting to RM1.4 million and RM4 million respectively. The plastic parts segment also registered lower margin due to higher material cost, higher material consumption and lower output.

Without the acquisition of IMS, Denko might continue to languish in losses, say observers. Denko remained in the red in the first quarter of the financial year ending March 31, 2018 (1QFY2018), with a net loss of RM2.23 million.

The company’s short-term borrowings stood at RM14.28 million in 1QFY2018, compared with cash holdings of RM1.19 million. Nevertheless, the high borrowings do not mean its business expansion is curtailed.

On the same day the proposed acquisition of IMS was announced, Denko said it was undertaking a private placement of 10.45 million new shares, amounting to 10% of the group’s share base, at an issue price to be determined later.

“The proposed private placement is expected to provide additional working capital and funds for capital expenditure to the Denko group for its business operations and at the same time, increase the flexibility of the group’s cash flow management,” Denko says in the announcement.

The proposed acquisition of IMS and proposed private placement are not conditional upon each other.

The acquisition of IMS will be a game changer for Denko as it will make the group one of the biggest EMS players in Malaysia. IMS’ supposed close relationship with Dyson in Johor, built upon its expertise in plastic injection moulding, is expected to benefit Denko immediately and in the long run.

“Dyson is in expansion mode. It wants to double its revenue over the next five years. With the acquisition of IMS, which has a good relationship with Dyson, Denko will benefit from the expansion of its major customer,” says the industry observer.

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