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This article first appeared in The Edge Malaysia Weekly, on February 8 - 14, 2016.

 

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AFTER having been listed on the ACE Market for more than four years, MClean Technologies Bhd may finally be ready to turn a profit after acquiring a 55% stake in DWZ Industries Sdn Bhd.

“With the inclusion of DWZ, which we acquired last September, we should be able to post a net profit for FY2015,” executive chairman Jason Yeo Hock Huat tells The Edge.

Recall that DWZ has provided a profit guarantee of RM3.9 million for FY2015 and a profit after tax of RM4.64 million for FY2016. MClean’s share of the profit guarantee works out to RM4.697 million over the two years. In contrast, MClean paid RM14.1 million for DWZ.

Bear in mind that for the nine months ended Sept 30, 2015, MClean posted a net loss of RM2.48 million, down from a loss of RM4.78 million the previous year. The group’s revenue also increased 44% to RM35.59 million.

Yeo, however, declines to discuss the exact figures for the group’s profitability so as not to pre-empt the company’s fourth-quarter earnings announcement, which will be made on Feb 25.

It was speculated that the acquisition of DWZ, which was paid for with MClean shares, was a reverse takeover or sorts. Lim Han Kiau, the largest shareholder in DWZ,  emerged with a 31.76% stake in MClean following the acquisition. Singapore-based Lim has since been appointed MClean’s chief executive.

Yeo however still retains the largest stake in MClean — 38.84%.

Looking ahead, the upside from the acquisition is not limited only to the profit guarantee from DWZ. On top of that, Yeo expects the synergy created by the acquisition to drive earnings growth.

“Together with DWZ, we will be able to take on bigger jobs as a full turnkey solutions provider, as opposed to offering services,” explains Yeo.

MClean specialises in precision cleaning, washing, assembly and other services related to the hard disk drive (HDD) and semiconductor industries. Its key clients include Western Digital and Seagate. Over the past four years, however, MClean has not been able to turn a profit.

“Before we listed, the industry was growing at double digits. But after we listed, growth suddenly slowed down and our capacity was too large,” says Yeo.

Combined with DWZ, however, he expects MClean to make cost-savings from synergy of about 20%. This is due in part to MClean leveraging on DWZ’s facilities, which will have a lower cost.

“We plan to do the lower value-add services, such as Label and 3D barcode removal, in Malaysia. This will be the bulk of the work. We will do the remainder of the high value-add work in Singapore. We should be able to save a great deal by warehousing in Malaysia as the cost is much lower,” says Yeo.

It is also important to note that MClean will not need to commit further investment to expand the scope of its existing work. Yeo says MClean and DWZ’s combined facilities will be more than sufficient for MClean to play the role of a turnkey solutions provider for the HDD industry.

MClean has about RM2.8 million in cash in its books and virtually no borrowings.

If all goes according to plan, the group should be looking at a market share of between 7% and 12% in the HDD segment alone.

One interesting aspect of the business is that MClean competes regionally for jobs. Hence, the scaling down of HDD production in Malaysia should not be a big problem for the group.

“HDD components are very light, so it isn’t too expensive to ship them around. We can compete for work in the region,” he explains.

The downside is that MClean will have to contend with more competitors. Nonetheless, Yeo points out that there are no comparable peers in Malaysia — in terms of the broad scope of services MClean offers as well as the quality and precision of work.

Another aspect of the business is the increased reach the group hopes to gain from the oil and gas industry. At present, the group does high-end surfacing work like electroplating of deepsea drill bits for companies such as Halliburton and Technip.

While there is a slowdown in the oil and gas industry, Yeo is still optimistic that MClean will be able to secure some jobs this year.

“Yes, [the] oil and gas [segment] will be challenging, but this is also an opportunity for us to gain a stronger foothold. Companies like Petronas may be slowing down their exploration and production activities. However, there are some ongoing contracts with vendors. We don’t work with Petronas, we do work for their suppliers. Together with DWZ, we plan to increase the scope of the work we undertake. For example, instead of surfacing drill bits, we want to manufacture the entire drill bit,” he says.

Overall, Yeo hopes that the oil and gas segment will contribute about 20% to revenue while the HDD and electronics segments will contribute evenly the remaining 80%.

Looking ahead, he says MClean is unlikely to pay dividends this year. It has never paid dividends since listing. “But we hope to pay dividends at some point when we are profitable. That is the goal we are working towards,” he adds.

The company is now looking out for new acquisitions and investments that will increase MClean’s growth and reach, says Yeo.

“One such example is MClean’s auxiliary packaging division. We will continue to monitor the economic and business conditions closely and will include the possibility of further fundraising to grow at a faster pace,” he adds.

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