Kumpulan Perangsang Selangor (KPS) slid into the red, reporting a core net loss of RM1.3m in 1QFY23 due to lower topline contribution from its manufacturing division, coupled with the underperformance in its trading and licensing divisions.  The Group’s 1QFY23 core net profit is below our and consensus estimates,  compelling us to lower our projected core net profit for FY23-25F by 7.6% on average to reflect wider-than-expected demand slowdown across its business divisions, in addition to higher borrowing cost. We remain wary on the Group’s near-term outlook as consumer consumption is dampened by the global economic slowdown which may result in lower demand for KPS’ services. While  KPS serves different industry segments, its consumer electronic clients make up approximately 40% of its total revenue. We maintain our Neutral call on KPS  though with a lower SOP-based TP of RM0.70 (previously RM0.74).

• Topline declined 16.5% YoY, as a result of slower contribution from the manufacturing, trading and licensing divisions. Contribution from the manufacturing division dropped 16.1% YoY due to lower sales demand albeit also seeing new revenue contribution from MDS Advance. On top of that, the  licensing division recorded a 55.5% YoY decline, attributed to the slower  recognition of an upfront payment by existing client.

• Pretax profit (PBT) shrunk 73% YoY. The Group recorded a lower pre-tax  profit of RM16.3m in 1QFY23, dragged by net loss on foreign exchange and  higher borrowing cost. Pretax earnings from the main business divisions i.e.: manufacturing, trading and licensing, registered a decline of 34.6% YoY on  average due to higher cost of sales.

• Recent developments. The Group has been actively scaling down its  operations since 4QFY22, particularly in China. Besides, KPS has taken  steps to de-carbonise its operations via the consumption of renewable energy. To-date, Century Bond’s plant in Senai, Johor is fully solar-powered whereas Toyoplus and CPI will follow suit by 4QFY23. Although savings from  the down-scaling of its China operations, as well as lower energy cost has  minimal impact to its bottomline at this juncture, we believe these measures  will benefit the Group in the long run.

• Outlook. We remain wary on the Group’s near-term outlook as consumer  consumption is dampened by the global economic slowdown which may result in lower demand for KPS’ services. While KPS serves different industry  segments, its consumer electronic segment makes up approximately 40% of  its total revenue.

Source: PublicInvest Research - 26 May 2023