Cosmos Seeks In-House Manufacturing Amid Supply Delays

Cosmos Technology International Bhd says currency swings and overseas delivery times of up to seven or eight months have led it to explore its own assembly and manufacturing capabilities. The company is proposing to buy a 51% stake in electronic manufacturing services company Orisystems Opto Sdn Bhd, with the aim of strengthening product development and manufacturing while addressing supply-chain uncertainties.

Managing director Datuk Chong Toh Wee discussed the proposal on the sidelines of Cosmos' annual general meeting the previous day. Cosmos assessed Orisystems for about one and a half years, Chong said, before deciding that the company’s technical capabilities and expertise would complement its business.

Manufacturing and product development

Orisystems makes electronics, including semiconductor-related components, chip-on-board technology for LED modules, smart-card modules and electronic components for aerospace applications. It hasn't previously made products for the water sector. The companies have started working together on product design and development, and they've produced prototypes that are undergoing testing.

“Proof-of-concept has yet to be completed,” Chong said. He added that Cosmos was considering branding the products locally under its own brand. Chong said the fundamental principles of electronic manufacturing services were similar across industries and that “the difference is only the product range.” Orisystems is interested in entering the water sector, which it sees as a growth opportunity amid potential projects.

New shares fund the proposed purchase

Cosmos said earlier in the week that it proposed to acquire the 51% stake for RM16.52 million by issuing new shares. The indicative purchase consideration of RM16.524 million would be fully satisfied with 33.048 million new Cosmos shares priced at 50 sen each.

That issue price represents a 27.71% premium over Cosmos' five-day volume-weighted average market price of 39.15 sen through October 16. The acquisition proposal also includes a profit guarantee. Orisystems must earn at least RM3.6 million after tax in each financial year ending December 31, 2027, 2028 and 2029, and at least RM10.8 million cumulatively over the three years.

Chong said he outlined Cosmos' future prospects to Orisystems' shareholders, including potential jobs, market share and government allocations, before they agreed to accept the offer. He said he considered the 50-sen share price low given Cosmos' growth potential. A higher price could be justified as revenue increased and its price-to-earnings ratio declined, he said.

Sharing future growth

Chong said the shareholders' willingness to accept the offer despite uncertainty about whether Cosmos could realize its potential showed trust in the company. He said he chose to structure the acquisition entirely through new shares rather than cash or a mix of cash and shares so both sides could share in Cosmos' future growth.

“If Orisystems takes cash, it's a one-off transaction. But if they hold our shares, when Cosmos grows, they also grow with us,” Chong said. “This is about building a long-term relationship.”

Cosmos ended the session five sen lower at 37 sen the previous day. The stock traded at a historical price-to-earnings ratio of 96.05 times.