UMS Integration

[Boon]

Just sharing what I found out about All Star Fortress Sdn. Bhd. (“ASF”).

According to the company website (http://allstarfortress.com/v1/), it is "a company in the manufacturing of precision tooling, transfer mold parts, jigs and fixtures mainly for the semiconductor, Aerospace and Automotive industries." Among the customers are:

Aerospace industry
- ACM Malaysia (http://www.acmsb.com.my/01_company_background.html), a JV company owned by The Boeing Company and Hexcel Corporation.
- Composites Technology Research Malaysia Sdn Bhd ("CTRM", http://www.ctrm.com.my/ahist.php), one of the approved supplier for Airbus (http://www.airbus.com/fileadmin/media_ga...-Dec15.pdf)

Semiconductor Industry
- Seagate (http://www.seagate.com/sg/en/)
- Western Digital (http://www.wdc.com/en/)
- Nidec Corporation (http://www.nidec.com/)
- Advanced Semiconductor Materials Fico Sdn Bhd (seems like a small company with no website of its own)
- UMS

Oil and Gas
- Cameron (https://www.c-a-m.com/)
- AkerSolutions (https://www.akersolutions.com/)
- Halliburton (http://www.halliburton.com/en-US/default.page)
- Boustead Holdings Berhad (http://www.boustead.com.my/)

I wonder why the press release only focus on the Aerospace Industry customers of ASF... Perhaps their performance in the other industries are not very fantastic? Or perhaps they only talk about the Aerospace industry because it is the hype in Malaysia now?

Please correct me if I am wrong. The arrangement between UMS and ASF is such that UMS will buy some 10% of ASF shares (RM 0.13 Mil) and convertible loan another USD 7.5 Mil for operating expenses (USD 0.85 Mil) and expansion (USD 6.65 Mil). Does that mean they can convert their loan to equity? If so, aren't they loaning too much? Since ASF is effectively valued at RM1.3 Mil or ~USD 300K. UMS will also give up some space of their Penang site to ASF via tenancy agreement (rental income?).

Taking all these into consideration, I am unsure as to whether this MOU is really yield accretive for UMS.

Industry Prospect:
 
Why the press release only talks about the aerospace industry?
 
My take is  
 
a)  With the current low oil price and bleak outlook in the oil and gas industry – I doubt if they have any near term (and even long term) intention to grow this market.
b)  The clients of ASF in the semiconductor industry seem to be mainly in the HDD/SSD segment – at lower end of the value chain as compared to that of UMS. UMS (with Norelco) used to be active in the HDD business but had moved out of this business long time ago and into the higher end of the value chain. I don’t think Andy Luong is keen to move back into (or has any intention to further expand) the HDD business of ASF - even if ASF could bring in more customers - as the margins are too low. Besides, if UMS could diversify its semiconductor customer base beyond its current single customer, it probably would have done so on its own. Similarly, if ASF could move up the value chain ladder on its own, it probably would have done so. If together, they could not bring in more businesses at the higher end of the value chain (which seems to be the case to me) – there would be little or no scope for cooperation and expansion in this sector - bear in mind that UMS still have excess production capacity in this area as well.  
c)   The brighter spot seems to be in the aerospace industry in Malaysia where they see significant growth potential.
d)  Moreover, they also see synergy in working together to expand production capacity and to capture market shares in the aerospace industry.    
e)   In short, the focus and basis of their cooperation is to grow and capture market share in the aerospace industry. 
 
Valuation of ASF / Convertible loan:
 
Would it be right to value ASF at MYR 1.3 million (or ~USD 300K)?
 
Would ASF be willing to sell 10% of its equity to UMS for the PRICE of MYR 0.13 million - without attaching the loan obligation part to it?
 
Without any financial reports (past performance) of ASF being given, I reckon it would be impossible to work out the current value of ASF.
 
It would not be called a convertible loan, if it could not be converted into equity.
 
Questions are:
 
What is the interest rate for the loan?
Would it be on secured or unsecured basis?
What is the tenure of the loan?
What is the timeline for conversion?
What is the conversion rate? 
Is conversion an obligation or just a right to the lender?
 
I reckon, without all these information being provided, it would be difficult to evaluate on how attractive this deal really is.
 
Well, as I have said before, the deal is only at MOU stage with lots of details yet to be ironed out. Hopefully, information would be made available as soon as they have been worked out.
 
That said, I would consider the following to be yield accretive to UMS, if as a result of the deal, it could:
- Increase its equipment utilization rate.
- Increase its labour utilization rate.
- Increase its factory space utilization rate

and I believe it could.
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