Kumpulan Perangsang Selangor (KPS) reported a core net profit of RM2.3m in 2QFY23, registering an improvement from a core net loss of RM1.3m QoQ. However, 1HFY23 core net profit slumped >80% YoY due to slowdown from the manufacturing, licensing and property investment divisions. 1HFY23 core net profit is below ours and consensus estimates by 3.4% and 4.4% respectively. Therefore, we slash our projected core net profit for FY23-25F by 48% on average to align with the bleak electronics demand outlook, coupled with challenging operating environment in regards to high operating cost. Though KPS serves different industry segments, its services are highly reliant on consumer consumption. Recall, consumer electronic segment represents about 40% of the Group revenue. As such, we change our valuation methodology from SOP to PBV multiple, to better reflect KPS’ value as earnings picture of the Group’s core businesses are likely to deteriorate as a result of global economic weakness. Nonetheless, we maintain our Neutral call on KPS however, with a revised lower TP of RM0.65 (previously RM0.70) pegged at 0.28x PBV (-1SD), in line with the deteriorating electronic manufacturing outlook.

• 1HFY23 revenue dropped 12% YoY. The Group’s core division, manufacturing, registered a 13% slump due to slower order traction as a result of lower electronics demand. Also, the division has yet to fully recover the loss of income from Customer A despite securing a number of new clients. That aside, the licensing division revenue declined 37.4% YoY due to slower billing of royalty payment to existing clients.

• 1HFY23 pretax profit (PBT) fell 41.6% YoY. The Group reported a lower pre tax profit of RM28.2m in 1HFY23, dragged by lower gross profit due to higher input cost (labour, electricity, paper, etc), coupled with higher net foreign exchange losses.

• Outlook. The Group’s earnings weakness is dragged by its manufacturing division, Toyoplus particularly. Manufacturing division headline PBT dropped 26% YoY as margins were squeezed, attributed to higher operating cost. Plant utilisation rate on average, has also declined to c.30%, well below the optimal level of 70%. We remain cautious on the Group’s earnings outlook as earnings picture of KPS’ core businesses are likely to deteriorate as a result of the global economic weakness.

Source: PublicInvest Research - 29 Aug 2023