We visited the manufacturing facilities of Kumpulan Perangsang Selangor’s (KUPS) 2 subsidiaries on Sept 13 – CPI Electronic Manufacturing Service (EMS) in Bayan Lepas, Penang and MDS Advance (MDS) in Simpang Ampat, Penang. We gathered 3 key takeaways from this visit: 1) The progress and update of CPI and MDS Advance manufacturing facilities, 2) Subtle margin improvement within CPI EMS segment and 3) Improved production efficiency in CPI EMS and MDS facility. We make no changes to our forecasts given that we have accounted for the changes from the 2 subsidiaries previously. Although we expect marginal changes to the Group’s earnings, we think the overall effect is negligible to the Group’s bottomline due to slowdowns across all end-segments, in line with the currently-weak electronics demand outlook coupled with challenging operating environment. All said, we retain our Neutral rating on KUPS with a sum-of-the-parts TP of RM0.65 pegged at 0.28x PBV.

• 1HFY23 results recap. Core net profit for 1HFY23 dropped >80% YoY mainly due to slowdown from the manufacturing, licensing and property investment divisions. The manufacturing division registered a 13% drop due to slower order traction as a result of lower electronics demand. Besides, revenue from the licensing division fell 37.4% YoY due to slower billing of royalty payment to existing clients. 1HFY23 Group earnings were 49.7% lower YoY, pressured by higher input cost and net foreign exchange losses.

• CPI’s new EMS facility goes online. The new EMS facility commenced its operations in Mar 2023. It is located in Bayan Lepas, Penang and has a built up area of approximately 3.9k sq m, with a 2-storey production floor of 5.1k sq m. Moving forward, we expect CPI margins would improve marginally as efficiency was raised by >200% (components placement per hour of 25k to 85k chips) from its 3 surface mount technology (SMT) production lines. From our back of the envelope calculation, this would bump CPI’s bottomline higher by 8% on average, in FY23-25, assuming 12% PAT margin (historically 13-14% on average) and 70% processing efficiency. However, Management’s initial plan to add a high-speed SMT production line has yet to be executed as production volume was reduced by 30-40% relative to FY2022. All told, we make no changes to our forecast as demand is still beleaguered by inventory overhang and overall electronics demand weakness.

• MDS Advance expansion completed. Located in Simpang Ampat, Penang, the facility, post-expansion, is double its original size with a production floor of 1.3k sq ft. Prior to expansion, the facility was running at 40% utilisation rate with 15% of their jobs outsourced to external parties as the plant was unable to operate at its optimal level due to ongoing renovation. Post-expansion, as of Aug 2023, the facility has achieved 57% utilization as MDS has brought back all of its outsourced jobs. We expect slight margin improvement as outsourced job dilutes c. 6-7% of MDS’ gross margin. Reliance on manpower has also been reduced by 10% with the addition of its new automated machine – Mazak 4- axis horizontal milling machine with Palletech systems.

• Our take. We remain cautious on the Group’s near-term earnings outlook as earnings picture of KPS’ core businesses are likely to remain subdued as a result of the global economic weakness. Also, management has indicated that the build-up of inventory resulting from the pandemic has yet to be unwound. Thus, we opine that the inventory overhang situation would only ease by 1QFY24 onwards. We make no changes to our forecasts given the abovementioned reasons. Besides, we have also accounted for the changes from the 2 subsidiaries previously in our forecast. Although we expect marginal changes to the Group’s earnings, we think the overall effect is negligible to the Group’s bottomline due to slow down across all end-segments.

Source: PublicInvest Research - 18 Sept 2023