Announced 2 acquisitions in Dec 2021

■ Grand Venture Technology Ltd (GVTL) ended 2021 with 2 new acquisitions (Formach and J-Dragon) that adds new capabilities and production capacity.
■ We think investors can expect more acquisitions in FY22F as the company remains steadfast in its expansion drive.
■ To better reflect its growth focus, we switch to a P/E methodology and factor in a base case profit contribution from J-Dragon for FY22F-23F.

M&A 1: Formach

GVTL is acquiring a 100% stake in Malaysia-based Formach Asia Sdn Bhd (Unlisted; established in Feb 2000) for S$7.8m (see Fig 1). Formach manufactures sheet metal, machine structure weldment, and provides electro-mechanical machine assembly services. This acquisition adds front-end semicon customers and production capacity (Formach has a 90,000 sq. ft. plant in Johor, Malaysia as at Dec 2021 to GVTL. GVTL paid a historical P/BV of 1.40x for Formach (based on end-Jun 21 book value).

M&A 2: J-Dragon

GVTL is acquiring a 100% stake in J-Dragon Tech (Suzhou) Co Ltd (Unlisted; established in Feb 2007) for S$12.2m. J-Dragon manufactures and undertakes R&D on parts, modules and tooling for the Aerospace, Medical and Semiconductor segments. We believe, this acquisition will help GVTL grow its medical business segment and enables the group to enter the aerospace industry. J-Dragon was valued at a historical P/BV of 1.90x (end-Jun 21 book value) by GVTL. On an annualised basis, the acquisition P/E multiple was 5.61x FY12/21 earnings. J-Dragon has a c.53,800 sq. ft. plant located in Suzhou, China as at
Dec 2021.

On the growth path

We are positive on these acquisitions as they add production capacity (see Fig 3) and allow growth with new customers and penetration into new industries. We expect further M&A and potentially further capacity expansion in FY22F. Our FY22F and FY23F EPS are raised by 4.0% and 5.0% respectively as we factor in contributions from J-Dragon (see Fig 4). For now, we do not assume any earnings impact from the Formach acquisition.

Reiterate Add

Previously, we valued GVTL using the Gordon-Growth method (4.49x FY22F BV/share of S$0.376). Given the company’s execution of its growth plans, we switch to a P/E valuation to better capture its growth profile. We now value GVTL at 15.8x FY23F EPS for a higher TP of S$1.74. Our target P/E factors in a 10.0% discount to the sector average P/E of 17.5x, given GVTL’s smaller market cap. Downside risks are operational disruptions (such as workers being possibly infected by Covid-19, power restrictions in its China plant, among others). Re-rating catalysts are stronger-than-expected results, potential new customer wins and more accretive M&A.