Scomnet

 Overview Supercomnet Technologies

A low cost but high quality supplier of medial devices

Scomnet manufactures and assembles wires and cables for various segments such as automative, medical devices, electrical appliances and consumer electronic. Scomnet acquisition of its Supercomal Medical Products (SMP) in 2018 has turned into a full fledged medical device manufacturer, which allow company to not only capitalize on the outsourcing trend of medical device manufacturing but also enjoy the steady growth expected of the medical device sector. (Expected CAGR 6% from 2019 to 2023).

1.High Barrier of entry in the Medical Segment.

Because of the stringent qualification criteria in place (ie. by the US Food and Drug Administration and the CE Marketing certification for the European Economic Area (EEA), medical products tend to offer higher margins and supplier customer relationship tend to be stickier as well. Given the high economic moat, venture into medical field required high degree of qualification.

2. Leaning towards high margin medical business.

Scomnet has been posting record revenue and earnings after consolidating the remaining 80% stake in associate SMP in april 2018, as part of its efforts to diversify its revenue streams from the competitive wire and cable industry. I expect scomnet to register a topline 3 years CAGR of 31% from FY20 onwards, underpinned by orders from existing medical customers Edward Lifesciences and Ambu as well as new customers. Expect margins to improve going forward as product sakes mix skew towards medical devices. 

3. Key risks

a)Delay in FDA approval of new product launches. 

While Scomnet has earnings visibility up until 2022 owing to existing customers’ product launches, earnings growth is also contingent on new products being approved by regulators. Therefore, a delay in approval may halt SCT’s earnings momentum beyond FY22.

b)Automative chip shortage may affect scomnet automative segment. 

c)Rise in raw material prices such as copper and pvc. 

4. Valuation

Based on 1 year forward P/E multiple of 40x on FY22E EPS. Target 1 year forward PE of 40x is justifiable given that translates to a target PEG ratio of 0.75x, expect earnings to grow by 54% in FY22E.