This article first appeared in The Edge Malaysia Weekly on October 2, 2023 – October 8, 2023
Penang-based SAM Engineering & Equipment (M) Bhd (SAM) is one of the few companies that have broken into the supply of parts for the highly regulated aerospace industry.
Controlled by Singapore Aerospace Manufacturing Pte Ltd (SAMPL), SAM plans to expand its aerospace business at a cost of more than RM550 million, a proposal that some view as “earnings dilutive”.
In a related-party transaction, SAM has proposed to acquire Aviatron (M) Sdn Bhd for US$43.4 million (RM203.4 million) cash from its major shareholder SAMPL. In addition to the purchase of the equity, SAM will also repay advances of US$42.8 million that Aviatron has incurred and settle debts of RM149 million. To fund the proposal, SAM will undertake a rights issue to raise RM557.8 million.
Based on analyst reports so far, Aviatron’s valuations seem a tad too lofty, as it is priced at a historical 81 times price-earnings multiple (PE) against SAM’s 29 times PE multiple. To be fair, however, Aviatron was hit by the pandemic in 2020, 2021 and 2022 as demand for air travel and aeroplanes dropped significantly.
It returned to the black only in the financial year ended end-March 2023.
Prior to the pandemic in 2019, Aviatron recorded a profit of RM24.4 million on a turnover of RM170 million, indicating a margin of 14%. Its earnings before interest, taxes, depreciation and amortisation was RM45 million, indicating healthy cash flow.
SAMPL’s initial cost of investment in Aviatron, incurred in 2011 and 2012, was RM30 million.
SAM’s justification for the proposal is that the value falls within the band set by an independent valuation done on Sept 25. Also, the proposed purchase price is based on the future earnings of Aviatron and cash flow for the next five years.
The company also said Aviatron was the sole manufacturer of nacelle beams for Airbus 220, Airbus 350 and Boeing 787 aircraft. Accordingly, it is confident that the acquisition will expand its presence in the aerospace industry and complement its existing aeroplane business positively.
While there may be sceptics to the proposal, a selling point is SAMPL, which is a unit of Singapore’s Temasek and holds 62.4% in SAM. SAMPL will be subscribing for its portion of the rights issue; thus, effectively, Temasek is putting money in the expansion.
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