KUALA LUMPUR (May 10): Integrated logistics service provider Xin Hwa Holdings Bhd plans to diversify into the precision machining business after acquiring a 79% stake in Jasa Machining Medan Micron Metal Engineering Sdn Bhd (Micron) for RM19.75 Jasa Machining million in a cash plus shares deal.
In a bourse filing on Tuesday (May 10), Xin Hwa said it had sealed a conditional share sale agreement (SSA) to acquire 79% or 355,500 shares in Micron through a combination of RM16.75 million in cash and the issuance of 10.51 million new Xin Hwa shares at 28.55 sen per share, amounting to RM3 million to the vendors: Hoon Eel An, Chia Ming How and See Kai Mun.
The SSA also entails a put option which enables the vendors to sell the remaining 94,500 shares or 21% equity interest in Micron for RM5.25 million in cash.
“Micron is principally involved in the manufacturing of precision machining components and parts. Micron primarily derives its revenue by way of purchase orders secured from customers for the manufacture and supply of its products,” the filing wrote.
On the rationale of the acquisition, Xin Hwa said it not only allows the group to control and consolidate the results of Micron, but also enables the class to embark on future growth opportunities by venturing into the precision machining business, which will expand its revenue base and generate additional income stream to the group.
Meanwhile, Xin Hwa highlighted that the acquisition of Micron also comes with RM4.5 million in profit guarantee for its financial years ending Dec 31, 2022 (FY22) through to 2024 (FY24).
Xin Hwa said the profit guarantee translates into an average annual profit guarantee of RM1.5 million per financial year, valuing it at 16.67 times forward price-to-earnings (PE) ratio based on the 100% consideration value of RM25 million, including the put option.
Xin Hwa’s filing wrote that Micron had recorded RM19 million in revenue and RM2.2 million in net profit for its FY21, while its net assets, cash and cash equivalents, and total borrowings stood at RM16.43 million, RM5.48 million and RM342,000 respectively, translating into a gearing ratio of 0.02 Jasa Machining Medan times.
Xin Hwa expects its proposed diversification to take immediate effect upon having obtained approval from its shareholders at its extraordinary general meeting (EGM) to be convened, while the acquisition is expected to be completed in the third quarter of 2022.
Xin Hwa shares settled at 29 sen on Tuesday, valuing it at RM71.1 million.