Northeast Group launches IPO, Subscription Opens on September 26

This IPO is issuing 168,989,000 new ordinary shares as follows:

– 37,000,000 shares are open for application by the Malaysian public;

– 29,600,000 shares are reserved for eligible directors, employees, and business associates who have contributed to the company's success;

– 61,689,000 shares will be privately placed to selected investors;

– 40,700,000 shares will be privately placed to identified Bumiputera investors approved by MITI.

Separately, there is an offer to sell 51,800,000 existing shares to Bumiputera investors approved by MITI.

Northeast Group Berhad, established on July 18, 2022 in Malaysia, is an investment holding company that specializes in the manufacturing of precision engineering components. Through strategic acquisitions, Northeast Group has wholly-owned subsidiaries namely NE Components, NE Integrated, NE Solutions, NE Technologies, and Northeast Precision, all engaged in the manufacturing of precision engineering components. The company operates through its subsidiaries, which have a strong track record in the sector, with the history dating back to 2004.

The Group's business operations are based in Penang, Malaysia. As at the latest practicable date  (LPD), the Group's business activities are carried out at 3 factories located in Juru and Bukit Minyak, Pulau Pinang with a total built-up area of approximately 208,468.19 sq ft.

The company's revenue was primarily derived from sales to overseas customers, which constituted approximately 78.32%, 77.15%, 73.90%, and 71.47% of the group's total revenue for the Financial Years Under Review and Financial Performance Estimate(FPE) 2024, respectively. The group's remaining revenue was attributed to sales to local customers, accounting for approximately 21.68%, 22.85%, 26.10%, and 28.53% of the group's total revenue for the same periods. In terms of revenue from overseas customers, the USA was the most significant contributor, representing about 48.34%, 39.84%, 32.78%, and 26.98% of the group's total revenue during the Financial Years Under Review and FPE 2024, respectively.

The company's business model and activities are summarised as follows:

Northeast Group's revenue saw a marked increase from RM113.21 million in FYE 2021 to RM144.52 million in FYE 2022, due to increased sales across all customer industries, particularly in photonics. However, a decline to RM93.34 million in FYE 2023 was attributed to a decrease in orders from significant customers. The cost of sales, which includes production overheads, material costs, and labor costs, mirrored the changes in raw material prices and order volumes, increasing in FYE 2022 and then decreasing in FYE 2023.

Despite this, the group's gross profit and gross profit margin exhibited an upward trend until FYE 2022, peaking at RM54.78 million and 37.90%, respectively. The slight increase in gross profit margin to 37.98% in FYE 2023, despite declining revenue, indicates the group's effective cost control measures.

Earnings per share (EPS) for basic and diluted shares increased from 2.68 sen in 2021 to 5.14 sen in 2022, then slightly decreased to 2.48 sen in 2023.

Northeast Group Berhad, a company operating within the precision engineering sector in Malaysia, is part of a dynamic and diverse industry. The precision engineering industry is a sub-segment of the broader engineering support industry (ESI), which is composed of seven primary segments: mould and die, machining, metal stamping, metal casting, surface engineering, heat treatment, and forging.

Precision engineering specifically entails the manufacturing of highly accurate components with close tolerances, which are essential for a variety of industrial applications. These include the photonics industry, where precision components are vital for equipment like laser amplifiers and engraving machines, as well as the electrical and electronics (E&E) industry, where components such as heat sinks and connectors are increasingly miniaturized to enhance portability.

The industry has demonstrated significant growth, expanding from a value of RM2.15 billion in 2020 to RM4.01 billion by 2023, outpacing the broader market. This growth is propelled by several key drivers. Firstly, there is a rising demand for precision engineering components from end-user industries globally. Secondly, an increasing trend in outsourcing manufacturing to specialized precision engineering companies for efficiency and cost-effectiveness. Thirdly, continuous innovation and product development in end-user industries necessitate the use of highly precise components.

However, the industry also faces certain risks and challenges. It is heavily reliant on foreign workers, making it vulnerable to labor shortages and changes in foreign worker policies. It is also sensitive to fluctuations in the prices of key raw materials like aluminum and copper. Economic downturns can affect the demand for precision engineering components, impacting the industry's financial performance.

Northeast Group Berhad, with its specialization in precision machining and surface finishing, holds a market share of 2.33% in Malaysia's precision engineering industry, as of the financial year ending 30 September 2023.

Northeast Group expects to use the gross proceeds raised from their Public Issue, amounting to approximately RM84.49 million in the following manner:

1. Construction of the New Factory: RM40 million, approximately 47.34% of the total proceeds, is allocated for the construction of a new factory. This is expected to be completed within 36 months and will enhance our production capabilities to meet growing demand.

2. Repayment of Bank Borrowings: RM20 million, approximately 23.67%, will be used to repay outstanding bank borrowings within 12 months, which includes reducing our gearing ratio and resulting in interest savings.

3. Purchase of New CNC Machines: RM12.38 million, approximately 14.65%, is planned for the acquisition of new Computer Numerical Control (CNC) machines within 36 months. This upgrade is aimed at increasing production capacity and efficiency.

4. Working Capital: RM5.52 million, approximately 6.53%, is intended to bolster our working capital within 12 months, particularly to procure essential raw materials such as aluminium, copper, and stainless steel to support our business expansion.

5. Estimated Listing Expenses: RM6.6 million, approximately 7.81%, will cover the expenses related to our listing on Bursa Securities, including professional fees, underwriting and placement fees, and miscellaneous expenses, all within one month.