KPS’ 51% owned subsidiary, Aqua-Flo SB (Aqua-Flo) has entered into a framework agreement with Pengurusan Air Selangor SB (Air Selangor) to supply and deliver various water chemicals from 1QFY24 until 4QFY25 (2 years) for RM162.2m. We project that the contract would bump up the Group’s bottomline by c. 6-7% per annum on average, over the contracted period of 2 years, assuming a mid-singledigit margin based on certain levels of purchase orders each year. Hence, we raise our earnings by 7.4% on average in FY24-25F due to the adjustments made to our earnings forecasts. Post adjustments, earnings contribution from Aqua-Flo represents approximately 30% of the Group’s total earnings in FY24-25F. As such, we ascribe a PBV multiple of 0.35 (average) to reflect the ameliorated earnings outlook as business risk is fairly diversified with Aqua-Flo despite the slowdown within its manufacturing segment. All said, we maintain our Neutral rating on KUPS with a revised TP of RM0.78 pegged at 0.35x PBV, as we rollover our valuation base year to CY24.

• Salient details of the agreement. Air Selangor is not obliged to honour the estimated contract sum of RM162.2m, as the actual quantities to be supplied is based on purchase orders issued over the 2 years contracted period. That aside, prices for the respective chemicals to be supplied are fixed and not subject to any changes, variations or cost escalations. Besides, Aqua-Flo is liable to remit 5% of the estimated contract sum to Air Selangor as performance bond.

• Our view. Earnings contribution from Aqua-Flo represents approximately 30% of the Group’s total earnings in FY24-25F. As such, we ascribe a PBV multiple of 0.35 (average) to reflect the ameliorated earnings outlook as business risk is fairly diversified with Aqua-Flo despite the slowdown within its manufacturing segment. We opine that the weakness in electronics demand could persist into 1HFY24 as global economic outlook continues to deteriorate as a result of slower spending and increased geopolitical tension.

Source: PublicInvest Research - 22 Nov 2023