Kumpulan Perangsang Selangor (KPS) announced the completion of the MDS Advance SB (MDS) acquisition for a total cash consideration of RM85m. To recap, KPS entered into a conditional share sale agreement with MDS for the acquisition of a 100% stake in the company on Dec 7. As per the announcement, KPS was given a net profit guarantee of RM8m and RM9m for FY23F and FY24F. Following the completion, we revise our projected core net profit for FY23F and FY24F by +2.4% and +2.5% respectively. We only make marginal adjustments to net profit estimates as we account for demand slowdown across all other business segments, in line with the deterioration in global outlook in 2023. Hence, we maintain our Neutral call on KPS though with a revised SOP TP of RM0.80 (previously RM0.78).

• Financial impact. KPS is expected to book a net profit of RM8m and RM9m in FY23 and FY24 from MDS following the completion of the acquisition. However, after accounting for demand slowdown across other business segments in KPS i.e.: Toyoplus, CPI, CBB, KKMW, we revise our projected core net profit for FY23F and FY24F by only +2.4 and +2.5% respectively. We think the adjustment is appropriate as more than 50% of KPS’ revenue is derived from the US, in line with the deterioration in global outlook in 2023. No impact is expected on net gearing post-acquisition, despite incorporating MDS’ total borrowings amounting to RM1.1m. Nonetheless, the Group’s cash pile is reduced by 16.7% to RM508.3m after deducting RM85.6m cash post acquisition.
  Recall, MDS reported an audited profit after tax (PAT) of RM 5.0m for FYE June 2019, RM8.5m and RM8.6m for FYE 31 July 2020 and 2021, on the back of RM16.9m, RM23.5m and RM22.2m revenue respectively. It is currently undergoing an expansion to double its size, which is expected to be completed by 1Q2023. We are slightly wary over revenue concentration risk in MDS as customer E makes up 60% of MDS’ topline in FY22. Nevertheless, Management has clarified that MDS has been reducing its exposure to customer E as revenue contribution from customer E was 68% in FY21. Moving forward, we opine that MDS will take up orders from existing KPS customers, though from other business segments due to its complementary nature to KPS’ manufacturing value chain. Dependency on customer E will be eliminated eventually.
• Our view. We are positive on this strategic acquisition as the addition of computer numerical control (CNC) metal machining complements its existing manufacturing portfolio which are largely situated in Penang. In addition, having MDS in its manufacturing arm would enable the Group to move up the EMS value chain.

Source: PublicInvest Research - 16 Jan 2023