Long-term Business Outlook Remains Resilient
We recently met with Kumpulan Perangsang Selangor (KPS)’s Investor Relations (IR) team, post 3Q22 financial performance. We remain optimistic on KPS’s long-term business prospects following the meeting driven by its resilient business prospect underpinned by diversified customer and product portfolio within the manufacturing segment. Near-term risks remain however amid global inflationary pressure which could dampen demand, ongoing supply chain disruption and geopolitical tension which may affects orders from customers within the manufacturing business. Given uncertain and challenging 2023’s outlook, KPS guided a single-digit revenue growth in the upcoming years.
The Acquisition of MDS to Strengthen KPS’s Manufacturing Segment
We foresee the recent acquisition of 100% stake in MDS Advance Sdn Bhd (MDS) – a high-precision computer numerical control (CNC) metal machine maker for a total cash consideration of RM85mn is in line with the company’s strategic move which aims to strengthen its market position within the manufacturing segment and at the same time fulfil the vertical integration within the segment. In addition, the acquisition of MDS came with a cumulative profit after tax (PAT) guarantee of RM17mn over 2023 and 2024 (RM8mn in 2023 and RM9mn in 2024) to safeguard the business’s bottom line post-acquisition.
With 2023 and 2024 profit guarantee of RM8mn and RM9mn with average 3-year PAT margin of 28%, we estimate MDS’s 2023F and 2024F’s revenue of RM27.8mn and RM31.2mn respectively. We believe the profit guarantee is achievable given healthy prospects for the global machining market globally coupled with MDS strong customer portfolio including Jabil, Plexus, Interplex, Sunright, TakWak, etc. According to Beroe Inc. Market Intelligence, the global machining market is expected to grow at a CAGR of 7% to reach USD414.2bn by 2024.
An Attractive DPS of 6.5 sen Declared, Ex-Dividend Date: 9th Dec 2022
KPS declared an interim and special dividend of 2.0 sen and 4.5 sen respectively which brings a total DPS to 6.5 sen. This translates to an attractive yield of 8.3% at current share price. Note that, the ex-dividend date is on 9th December 2022 and the entitlement date is on 12th December 2022. The announcement of the special dividend was subsequent to the proceeds of RM183.4mn following the disposal of 20% shares in SPRINT Holdings.
Earnings Revision
Following KPS’s guidance on slower growth for revenue amid challenging global situation which may impact consumer electronics, automotive, and the mattress segment, we cut 2023F/2024F earnings by 2%/8% in line with lower revenue assumption. Notwithstanding that, KPS’s long-term outlook remains attractive given its resilient and large business exposure within the manufacturing coupled with ongoing optimisation initiatives that would provide healthy earnings growth to the company.
Reiterate BUY at lower TP of RM0.83
We reiterate our BUY call on KPS at a slightly lower TP of RM0.83 (from RM0.85), pegged at 10x PER to 2023 EPS of 9.4 sen. We believe this is justified given its robust outlook within the manufacturing business, competitive EBITDA margin, and good dividend yield. We see the rebound in KPS’s share price recently since the announcement of special dividend as normal and we expect the share price to normalise between RM0.69-RM0.73 level after the entitlement. At our TP, total return including dividend yield is almost 17% and hence our BUY recommendation.
Source: BIMB Securities Research - 8 Dec 2022
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