Investment Highlights:

Kucingko Bhd (KB) has a strong 17-year track record in the 2D animation industry, known for producing world-class animations that meet the standards of renowned clients such as Warner Bros., Cartoon Network, and Xilam Animation. With a significant expansion plan and a rising demand for digital entertainment, KB is poised for substantial growth.

Financial Projections:

For the fiscal years 2024 and 2025, KB’s topline is projected to grow to RM33.0 million and RM39.0 million, respectively. This growth is supported by an increase in personnel, enabling KB to take on more projects. Consequently, the core net profit is expected to rise by 31.2% YoY to RM11.0 million in FY24 and by 27.1% YoY to RM13.9 million in FY25, with improved margins due to the management’s strategy of taking on more complex and higher-margin jobs.

Valuation and Target Price:

The fair value of KB is ascribed at RM0.585, derived by pegging a forward P/E of 21.0x to the FY25 EPS of 2.79 sen. This forward P/E is justified as it aligns with the average current P/E of selected international peers in the 2D animation production industry. Given the current share price of RM0.30, this represents a capital upside of 95.0% and a total return of 97.9% including the dividend return.

Risks:

Key risks include dependency on major customers, changes in consumer preferences towards 3D animation, exposure to foreign exchange fluctuations, and reliance on skilled manpower. Any adverse developments in these areas could impact KB’s financial performance and growth prospects.

Conclusion:

Kucingko Bhd presents a compelling investment opportunity with significant upside potential driven by robust demand for digital entertainment, strategic workforce expansion, and a strong client portfolio. The target price of RM0.585 offers an attractive return for investors looking to capitalise on the growth of the 2D animation industry.