• The stage is set for KPS to unleash its potential, as the company undergoes a significant transformation into a manufacturingbased entity that would culminate in doubling of ROE in the next 3 years. KPS has also disposed off some low-returned companies.
   
• KPS’s manufacturing businesses were acquired at the right time and are currently riding the wave of post-recession recovery and exceptional “new norm” demand, particularly in E&E segment.
   
• With earnings predicted to soar driven by manufacturing and higher-than-industry average EBITDA margin, we believe KPS deserves a re-rating, juxtaposed with with recent establishment of at least 30% dividend payout policy.
   
• KPS has placed a strong commitment towards EES and ESG standards, supported by numerous awards and achievements, which will put the company in good stead with sustainabilityfocused investors.
   
• Initiate coverage on KPS with BUY recommendation at TP of RM1.60, pegged at 18x PER on 2021 EPS of 8.9 sen.

An entity transformed – enormous potential lies ahead

KPS is currently undergoing a business transformation that has resulted in significant change in the make-up of the company. We forecast KPS’s core earnings to grow at a CAGR of 23% over 2020 – 2023F on stronger contribution from its fledgling manufacturing segment which now represents 83% of revenue. The manufacturing segment, especially plastic moulding, will ride on demand wave for consumer electronic products globally in tandem with advancement in technology.

Deserves re-rating on higher PE valuation

The stock is still trading at 11x 12-month forward PE, below sector peers at 20x PE, and undeservedly so. We argue for higher valuation to better reflect its new business and earnings growth potential from manufacturing segment. Moreover, KPS enjoys an overall EBITDA margin level at 9-11%, above its peers. The company has customised and integrated services, as well as diversified customer portfolio. Furthermore, KPS has announced a formal dividend payout policy of a minimum 30% of its PATAMI.

KPS is a sustainability believer

KPS has long adopted a sustainability framework that has been institutionalised within its group of companies. The company is committed to adhering to the sustainability standards across its subsidiaries through establishment of the Sustainability Framework by integrating United Nations Sustainability Development Goals (UNSDG). This includes the high usage of Forest Stewardship Council (FSC) certified kraft paper, increase in usage of biodegradable and environment friendly chemicals, adoption of energy efficiency and waste management.

Initiate with a BUY call with TP of RM1.60

We initiate coverage on KPS with BUY recommendation at a TP of RM1.60, valuing the stock at 18x PER on 2021 EPS of 8.9 sen. We think the market has overlooked KPS in the past due to its fragmented and low-return business. We believe the new and transformed KPS will fulfill its value-creation plan to enhance businesses and thus realise a sustainable, long-term earnings growth.

Source: BIMB Securities Research - 6 Apr 2021