Broker: UOB Kay Hian
Date of Report: Monday, 21 July 2025

Northeast Group: Undervalued Engineering Player Positioned for Explosive Growth in 2025 and Beyond

Overview: Investment Highlights and Strategic Positioning

Northeast Group (Bloomberg ticker: NE MK), a leading manufacturer of precision engineering components for the E&E, optoelectronics, photonics, semiconductor, and telecommunications sectors, stands out as a compelling BUY despite a remarkable 91% share price rally since April 2025. The company’s valuation remains highly attractive at just 18x FY26F PE, positioning it among the most undervalued integrated engineering solution providers in the market.

• Current Price: RM0.65
• Target Price: RM0.89 (Upgraded from RM0.72)
• Potential Upside: +36.9%
• Market Cap: RM481.0 million (US\$113.2 million)
• Shares Issued: 740 million
• FY25 NAV/Share: RM0.35
• FY25 Net Cash/Share: RM0.21
• Major Shareholders: Mountain Range (53.7%), Ng Chay Chin (5.2%), Norges Bank (4.5%)

Key Catalysts: Strong Orderbook and Robust Demand

Northeast’s recent surge is supported by solid financial performance, improved order visibility, and resilience in the face of tariff uncertainties. Key customer orders remain strong (utilisation rate at 95%), with the orderbook at RM32 million and a replenishment rate of about RM10 million per month. The company is seeing a ramp-up as new product introductions (NPIs) in photonics and semiconductors transition to mass production, reflecting robust underlying demand and healthy forward visibility.

Strategic Expansion to Capture the Next Growth Wave

Northeast is advancing its transition from a precision component manufacturer to an integrated engineering solutions provider at the sub-modular level. The company’s strategic initiatives include:

• New Factory Construction: Targeted for completion by 2028, boosting production capacity by 50% with state-of-the-art CNC machinery.
• Dedicated Warehouse Facility: Improving logistics and scalability.
• Emerging Technologies: Poised to capitalize on growth in 6G wireless networks, advanced data centre cooling systems, and new product markets.
• Potential US Presence: Exploring a US footprint to mitigate tariff headwinds and enhance global reach.

Financial Performance Snapshot and Outlook

Northeast delivered a strong 2Q25, with core net profit up 52% quarter-on-quarter to RM6.1 million, buoyed by higher loadings from new photonics and semiconductor customers. While minor shipment disruptions are anticipated post-Liberation Day, the company is expected to post even stronger results in the second half of FY25, with projected core net profit of RM9.5-10.5 million (vs RM7.9 million in 1HFY25).

Key Financials (All figures in RM million unless stated):

Strategic Portfolio and Customer Relationships

Since its inception in 2004, Northeast Group has forged strong partnerships with global leaders in photonics, E&E, semiconductor, telecommunication, and optoelectronics. These close ties drive its growth, as the company is actively engaged in R&D and product design for:

• Fibre laser applications in material processing, e-mobility, and bio-medical sectors
• Connectors, switchers, and transceivers for telecom, AI, and data centre applications
• Base station and antenna technologies for new generation cellular networks
• Next-generation smart devices for top-tier technology players

The company’s exposure to cleanroom services and surging demand for advanced cellular networks further bolster its growth prospects.

From Industry Trough to New Growth Trajectory

Northeast experienced a sharp revenue and profit decline in FY23 (revenue down 35% to RM93.3 million, net profit down 51% to RM18.4 million) due to industry downturns and geopolitical tensions. Despite operating at a 65-73% utilisation rate in FY23, the company preserved margins through high manufacturing yields and strategic exposure. Northeast is now rebounding with sequential quarterly improvements forecasted from FY25, supported by healthy open purchase orders and a diversified product portfolio.

• 47% of RM84.5 million gross proceeds allocated for new factory construction (doubling floorspace to over 435,000 sq ft)
• 15% for new CNC machines (+13% production capacity)
• 7% for working capital

Earnings Revision and Upgraded Valuation

Following recent meetings and positive order flow, FY26 earnings have been raised by 24% to reflect a more favourable product mix. The new target price is RM0.89, based on 25x FY26F PE—a 25% discount to the sector’s seven-year mean. FY26 revenue and net profit are projected to rise 31% and 52%, respectively, driven by cyclical industry recovery, deeper integration into customer technology roadmaps, and significant capacity expansion.

Profit & Loss, Balance Sheet, and Key Metrics

Conclusion: Northeast Group Remains a Top Small-Mid Cap Pick

Northeast Group’s combination of strong customer relationships, strategic expansion, healthy orderbook, and robust financials make it a standout investment for 2025 and beyond. With a significant runway for growth, attractive valuation metrics, and a clear plan to capture emerging opportunities in advanced manufacturing and technology, Northeast offers compelling upside for investors seeking exposure to the next wave of engineering and technology innovation.