KUCHING: Eng Kah Corporation Bhd (Eng Kah) recently announced that it has entered into an agreement with Cosway China to form a joint venture company to undertake manufacturing activities for the Chinese partner’s range of products.
“The agreement was for the joint venture company to undertake the manufacturing of products such as perfumes, colour cosmetics, skin care products, toiletries and household products for sale and supply to Cosway China and other businesses,” according to Kenanga Investment Bank Bhd (Kenanga Research).
Eng Kah would own 30 per cent equity interest in the joint venture and provide the necessary manufacturing experience, expertise, technology and production management as well as know how to the joint venture.
Kenanga Research opined that the total issued and paid up capital of the joint venture should not exceed 10 million Chinese yuan for now, unless otherwise agreed by both parties.
The research house believed that the collaboration was a great way for Eng Kah to tap into the behemoth Chinese market together with Cosway China while starting on a low cost footing of about RM1.5 million funded via internal cash.
“However, we think that the venture could be scaled up fast. Eng Kah, riding on Cosway’s expansion plan in China, is a strong catalyst that will have a substantial drive to Eng Kah’s earnings growth ahead,” Kenanga Research enthused.
The research house was maintaining its number at the moment, pending further discussion with the management, but it stressed that the market was probably still unaware of the real implication of the collaboration.
The joint venture company’s success was believed to have a much stronger impact on Eng Kah, given its much smaller size against its partner. Kenanga Research reckoned that the upside impact could be at least 20 to 30 per cent on Eng Kah’s future earnings with 10 per cent possibly in the first year.
“Eng Kah’s joint venture will get a chunk of sales here, assuming it supplies a 50 per cent share of the RM110 million sales and Eng Kah has its 30 per cent share of the entity. It could thus see additional net profit of around RM1.9 million, which is around an increase of 10 per cent of our current financial year 2012 forecast net profit,” the research house predicted.
Going ahead, Kenanga Research believed that Eng Kah was undervalued even without incorporating the huge upside potential from the joint venture. This was backed by its strong growth story due to the rising expansion of its multinational clients as well as its high dividend yield of 6.4 per cent for financial year 2012.
It went on to peg a target price of RM3.85 per share for Eng Kah as it remained upside biased, anticipating a forecast upgrade once more details were provided by the management.