ACQUIRED new subsidiary: HG Metal is acquiring a 72.29 per cent stake in Niho (Singapore) Pte Ltd. It has entered into a conditional investment agreement to buy 1.5 million new shares from Niho for $1.5 million in cash. This will be funded by internal resources.

Established in 1997, Niho supplies stainless steel, ferrous and non-ferrous raw materials to the computer, telecommunications and electronics-related industries in Singapore, Malaysia, Indonesia, the Philippines and Vietnam. In 2005, it set up a plant in Kunshan, China. Currently, Niho has a total of four precision slitting machines in Singapore and Kunshan.

Niho's customers supply their products to major MNC manufacturers in Asia, such as Seagate, Maxtor, Philips, Hewlett-Packard, Sony, Canon, Nokia and Motorola. These MNCs recognise Niho (an ISO 9000 awarded company) as a high-quality and experienced supplier of precision slitting.

The acquisition will add stainless steel products to HG Metal's existing product range. It will also extend its customer base to precision metal stamping and manufacturing industries. Niho is planning to use the $1.5 million proceeds to increase its working capital for its Singapore operations and expand its manufacturing capacity in Kunshan. Having HG Metal as a parent will help Niho diversify into the building and engineering sectors, where HG Metal has a strong customer base.

HG Metal's purchase price values Niho at $2.07 million. This translates into an acquisition P/E of 11.7x for FY05 and P/NTA of 1.0x (on enlarged share capital). Niho is targeting to increase its revenue by nearly three times from $7.3 million to $20 million in two to three years' time. Assuming that this revenue target is achieved by FY08, we estimate the payback period for HG Metal at three to four years.

We have maintained our FY06-08 earnings forecasts for HG Metal given that Niho's earnings contribution will be relatively small (less than 2 per cent). Our target price remains 45 cents, pegged at 7x CY06 P/E. Maintain 'trading buy'. HG Metal's earnings visibility beyond the next three months remains limited, given volatile steel prices and currency rates.