We recently hosted a virtual meeting with Kumpulan Perangsang Selangor’s (KPS) management for updates on its businesses and we had gathered several key positives on its fundamental and long-term business outlook.

• Paradigm shift through strategic BTP. KPS is undergoing a paradigm shift through its business transformation plan (BTP) since 2016 to focus into core business segment with high-growth and steady income that could provide catalyst to KPS’s business performance in the long-run as well as better return to the shareholders. Its strategic and well-timed BTP is paying off as its revenue surpassed the RM1bn milestone at RM1.1bn (+24% yoy). Along the journey, KPS had disposed its less attractive and low return investment (Figure 1) including Syarikat Pengeluar Air Selangor Holdings Berhad (SPLASH) in 2018 which contributed RM100m to the group. However, the gap left from disposal of SPLASH since then has been filled by higher contribution from acquisition of new assets; Kaisercorp Inc., Century Bond Berhad (CBB), CPI Penang S/B (CPI), and Toyoplus Manufacturing (Malaysia) S/B (Toyoplas), with exposure in manufacturing industry (Table 1).

• LEAP25, the next 5-year business plan. Following KPS’s successfully and timely BTP, KPS has established LEAP25, its 5-year business plan (2020 – 2024) (Figure 2) to enhance further its business performance. Under LEAP25, KPS aims to focus in strengthening the group position among industry players at the same time improve its long-term profitability through 1) ongoing value creation plan – optimizing product mix to safeguard business margin, securing new projects from existing and new customers as well as looking into penetration for new market or sub-industries, 2) double up its ROE from current level of 4.2%, and 3) optimizing total shareholders return – establishment of at least 30% dividend payout policy of PATAMI annually (on 30 March 2021).

• Toyoplas profit guarantee to be delivered in 2021. Toyoplas acquisition had come with profit after tax (PAT) guarantee of RM39.6m in 2019 and RM42.3m in 2020. However, Toyoplas did not meet its profit guarantee in 2020 due to Covid-19 and reported PAT of only RM11.5m (Figure 3) on higher shipping and raw material cost. Management guided that the profit guarantee amount of RM42.3m will be delivered in 2021.

• KKMW to be in the black by 2Q 2021. King Koil Manufacturing West (KKMW) losses were narrowed down since the set-up of the manufacturing facility in 2019 to RM1.5m in 2020 (Figure 3) from RM6.3m. Management guided that KKMW is expected to be in the black by 2Q2021 on increase in production as it secured 6 new key customers. KKMW is seeing higher utilization rate of 49% compared to pre-Covid level at 39.6%. Besides, we anticipate stronger contribution for KKMW in 2021 on existing customers due to rise in demand for mattresses. Demand in the US is seen improving as a result of higher infrastructure investment in residential sector and expansion in tourism industry as Covid-19 cases ease.
   
• Management revisited 4-year financial performance guidance. KPS’s manufacturing segment (represents 83% of total revenue) has proven its resilient business performance and grew 37% yoy to RM895m in 2020 from RM651m in 2019 despite most of it plants running at lower utilization rate amid lockdowns and movement restriction to curb the spread of Covid-19 pandemic. This better performance was underpinned by surge in demand for consumer electronics as people are forced to carry out remote working, online education and have better entertainment while at home. Continuous strong demand for consumer electronics riding on wave of post-recession recovery, higher utilisation rate across all plants and addition of new customers, as well as production of new products in tandem with progress in technology, are expected to contribute positively towards KPS's long term earnings growth. On this note, management has revisited its 4-year (2021 – 20024) financial performance guidance (Figure 4) due to a more resilient and optimist outlook across its subsidiaries.
   
• Maintain BUY with TP of RM1.60. Maintain BUY call on KPS at a TP of RM1.60, valuing the stock at 18x PER on 2021 EPS of 8.9 sen. We remain upbeat on KPS following the meeting with management who provided more clarity on its business directions. Management remains steadfast and focused on executing its strategic planning to enhance the company’s long-term business and financial performance.

Source: BIMB Securities Research - 22 Apr 2021