Volcano Berhad (“Volcano”), an international manufacturer of nameplates and plastic injection moulded parts, is seeking to raise RM8.75 million from its upcoming initial public offering (IPO) on 6 April 2021. If you are looking at Volcano with interest, here are 9 things to know before you invest.  

  1. Group structure and business model

Volcano was incorporated in Malaysia in 2018 and is an investment holding company. Through its subsidiaries, the group is principally involved in the manufacturing of nameplates and plastic injection moulded parts used in the electrical & electronics (E&E) and automotive industries. Its group structure is as follows:

(Source: IPO prospectus)
VNP – Volcano Name Plate Sdn Bhd

VTT – Volcano Tec (Thailand) Co Ltd

Parts and components manufacturing is a key component of the manufacturing industry value chain. Other components of the manufacturing industry value chain include product design, sourcing for material supply, manufacturing and assembly, quality control, and marketing and sales to end-users. The diagram below shows the position of Volcano group in the manufacturing value chain.

(Source: IPO prospectus)

  1. Principal segments

Volcano’s business can be divided into two main segments:  

  1. Manufacturing of nameplates – The group’s nameplates is generally for commercial applications which contain the name of a person, company or logo brand recognition, and for product identification and instructional purposes. It manufactures nameplates at its head office and factory in Perai, Penang, as well as its factory in Rayong, Thailand.  
  1. Manufacturing of plastic injection moulded parts – The group’s plastic injection moulded parts are mainly for refrigerators, washing machines, sewing machines, power tools and automotive vehicles. It carries out plastic injection moulding at its factory in Rayong, Thailand.  

The group derives a larger portion of its revenue from the manufacturing of nameplates. The nameplates segment and plastic injection moulded parts segment contributed approximately 66.0% and 34.40% of the group’s revenue for the financial year-end (FYE) 2020 respectively.   

(Source: IPO prospectus)

  1. Customers   

Volcano’s customers mainly comprise multinational corporations (MNCs) in the E&E and automotive industries with operations in the Southeast Asia region. Its customers also comprise Original Equipment Manufacturers (OEMs) which are contract manufacturers appointed by the MNCs. 

The group also manufactures and sells to other customers such as nameplate manufactures, label manufacturers and trading companies who supply nameplates to their customers. These other nameplate manufacturers engage Volcano’s services for various reasons, amongst others, capacity constraint and/ or inability to manufacture certain types of nameplates. 

The breakdown of the revenue contribution from its MNC, OEM and other customers in the E&E, automotive and other industries are as follows:

(Source: IPO prospectus)

Volcano’s future performance relies largely on the group maintaining its status as an approved supplier/ vendor with its major MNC customers. In tandem with industry practice, Volcano does not have any long-term contracts with its customers as the latter would purchase products by way of purchase order on project-to-project basis or as-needed basis. 

While Vocano group has a diversified customer base of more than 100 customers from various end-user industries such as E&E and automotive, its top 5 major customers in aggregate accounted for approximately 69.5% of the group’s total revenue for FYE 2020. These 5 major customers include Donaldson Thailand, Fisher & Paykel Thailand, HP, Bernina (Thailand) Co., Ltd and Beko Thai Co., Ltd. Hence, the loss of any major customers and/or the inability to secure new purchase orders from new customers may adversely impact Volcano’s operating results. 

  1. Principal markets 

Volcano derives the majority portion of its revenue from overseas. Singapore is the principal market for its nameplate products and has been its major export market contributing approximately 44.0% of the group’s revenue for the FYE 2020. Meanwhile, its second-largest revenue contributor is Thailand, which is the principal market for its plastic injection moulded parts, where it contributed proximately 44.1% of the group’s revenue for the same FYE. 

(Source: IPO prospectus)

  1. Utilisation of IPO proceeds

Volcano intends to use the IPO proceeds raised of approximately RM8.8 million as follows:

  • RM5.6 million or 63.4% is earmarked for the purchase of machinery and equipment to enhance its production efficiency; and
  • RM3.2 million or 36.6% is to fund listing expenses. 
DetailsUnitsRM’ million
Laser cutting machines63.6
Pick and paste machines52.0
Total115.6

The purchase of 6 additional units of laser cutting machines is expected to increase its laser cutting production capacity by approximately 33.3%. Meanwhile, the 5 units of pick and paste machines are intended to automate and speed up the picking and pasting process. 

  1. Business strategies 

A summary of the group’s business strategies is set out below:

  1. Improve the efficiency and capabilities of its nameplate and manufacturing process through the purchase of additional laser cutting machines and pick and paste machines (as mentioned in the utilisation of IPO proceeds section above).
  1. Expand its plastic injection moulded parts manufacturing business with the purchase of 5 additional plastic injection moulding machines, which will increase its capacity by 15.7%. The total cost of acquiring these 5 units of plastic injection moulding machines will be approximately RM2.3 million to be funded via internally-generated funds. 
  1. Expand its factory in Rayong, Thailand in anticipation of the growth of its business. Volcano plans to build a single-storey high ceiling factory annexed with the existing factory, to place the 5 new units of plastic injection moulding machines outlined in (b). The total cost of the building expansion is expected to cost approximately RM4.8 million to be funded via internally-generated funds. 
  1. Expand its presence in the E&E and automotive industries in Thailand though participation in external events and exhibitions where the group can showcase the advantages and benefits of its solutions as well as leverage on its existing business relationships with its customers and business associates in Thailand. 
  1. Competitive landscape

The barriers of entry for the nameplate manufacturing and plastic injection moulding industries are generally low as raw materials, and machinery and equipment can be easily sourced in the market. The upfront cost required can be low if a new industry player chooses to start with a small production capacity with limited product and service offerings. New industry players may compete aggressively in the product pricing which may temporarily disrupt the pricing competitiveness of existing players. New industry players must also be able to be competitive in other areas such as product quality, and capabilities in manufacturing a range of products together with strong customer service, amongst others. Further, nameplate manufacturing and plastic injection moulding industry players must have the capabilities to scale up their businesses to achieve greater economies of scale to maximize profitability in order to maintain their sustainability in the long term.  

An independent market research report by Smith Zander has identified the following list of key nameplate manufacturing players in Malaysia. On average, the gross profit (GP) margins of key nameplate manufacturing industry players in Malaysia (excluding VNP, which is a wholly-owned subsidiary of Volcano) stood at 29.6%. VNP is only the 5th largest player on the list in terms of revenue, but its GP margin is superior than the industry average.  

(Source: IPO prospectus)

  1. Substantial shareholders 

Collectively, Volcano group’s promoters and substantial shareholders will hold approximately 63.6% of the group’s shares post IPO. 

(Source: IPO prospectus)

The profiles of its promoters and substantial shareholders are as follows:

  1. Datuk Ch’ng Huat Seng – Datuk Ch’ng is the group’s Co-Founder and Managing Director. He is responsible for the overall operations of VNP and overseeing the growth and overall strategic direction of the group. Over the span of 22 years, he has expanded the group’s operations from a small-scale nameplates manufacturer into a group of companies specializing in the manufacturing of nameplates and plastic injection moulded parts.
  1. Gan Yew Thiam – Mr Gan is the group’s Co-Founder and Non-Independent Executive Director. He is responsible for overseeing the procurement and operations of VTT. 
  1. Dato’ Wong Tze Pang – Dato’ Wong is the group’s Co-Founder and Non-Independent Executive Director. He is responsible for overseeing the strategic planning and business development of the group.
  1. Yeap Guan Seng – Mr Yeap is the group’s Co-Founder and Non-Independent Executive Director. He is responsible for the procurement and operations of VNP. He is also in charge of overseeing the operations and R&D of the group.
  1. Khoo Boo Wei – Mr Khoo is the group’s Non-Independent Executive Director/ Chief Financial Officer and is responsible for corporate affairs, financial reporting and business assessment of the group.  
  1. Financial Highlights  
Audited
FYE 2018FYE 2019FYE 2020
RM’000RM’000RM’000
Revenue 58,64955,89252,527
Gross profit 18,97317,13115,139
Profit after tax 6,9524,7803,383
Gross profit margin (%)32.430.728.9
Profit after tax margin (%)11.98.66.4
Basic earnings per share (EPS)4.973.412.42
Diluted EPS4.212.902.05
As at 31 Dec 2018As at 31 Dec 2019As at 31 Dec 2020
Current ratios (times)N/AN/A7.2
Gearing ratio (times) 

(Source: IPO prospectus)

Volcano is a profitable company. However, the group has recorded a decrease in revenue by 4.7% in FYE 2019 and 6.0% in FYE 2020. On an overall basis, the decline in the revenue of the group was partly contributed by lower demand from one of its major customers, namely HP, as a result of the changes in sales mix towards non-metal nameplates with lower average selling prices and disruption of operations caused by the outbreak of the Covid-19 and Movement Control Order (MCO).  

Separately, Volcano is in a stable financial position since it has a current ratio of 7.18 times and zero borrowings as at 31 December 2020. The group intends to distribute a dividend of at least 30% of its annual profit after tax to shareholders. At a proposed IPO price of RM0.35, shares of Volcano will be trading at a trailing price to earnings (PE) ratio of 14.5 times, with an estimated dividend yield of 2.1%. 

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