• We recently visited the subsidiaries of Kumpulan Perangsang Selangor (KPS), namely CPI (Penang) Sdn Bhd and MDS Advance Sdn Bhd (MDS), to gain a more comprehensive insight into the operational activities of the company.

• Despite the various near-term headwinds faced by KPS, we remain optimistic due to its strengthened portfolio of assets resulting from strategic acquisitions of cash-generating companies and the disposal of non-core businesses.

• Overall, our optimism lies in the expectation of earnings recovery driven by two key factors: (i) the growth of the newly acquired MDS and (ii) the potential addition of new clients for CPI amid heightened geopolitical tension.

• As one of the investment arms of the Selangor State Government, KPS has maintained a consistent record of dividend payments to its shareholders. We anticipate that KPS will provide its shareholders with a DPS of 4.5 sen for the FY23-FY25, resulting in a 6.3% yield based on the current share price.

• Maintain our HOLD call on KPS with higher TP of RM0.77 (RM0.63 previously) which implied FY24 PER of 20.3x and FY24F P/B of 0.4x. No changes to our FY23F earnings forecast but tweaked FY24-25F earnings projection lower on cautious demand outlook, foreseeing that the company's recovery is likely to take place FY25F onwards.

Prospering on EMS Expansion

The Group holds a positive outlook for advancing its expansion in the Electronics Manufacturing Services (EMS) sector through strategic acquisitions of income-generating assets that align with their portfolio strategy. This is a crucial step in laying the foundation for the new KPS. It's worth recalling that in December 2022, the Group successfully completed the acquisition of MDS Advance Sdn Bhd (MDS), a manufacturer specializing in high-precision computer numerical control (CNC) metal machines. The acquisition was finalized for a total cash consideration of RM85mn. MDS has demonstrated strong performance and is on track to meet its specified profit guarantees of RM8mn and RM9mn for FY23 and FY24, respectively.

We hold an optimistic view on MDS's growth potential, primarily attributed to its substantial increase in automation levels achieved through the modernization of its machinery and equipment. This advancement has led to reduced delivery times for clients and alignment with industry standards. The strategic investment in new equipment is expected to stimulate greater demand for MDS's products, improve utilization rates, and result in cost reductions. Of note, MDS recently completed a factory renovation to expand its production capacity. In response to the escalating demand, the company is also considering a move to a larger facility within the next 2 to 3 years to effectively accommodate its growing requirements

A Better Year for CPI in FY24

CPI serves as a comprehensive solution center, specializing in Plastic Injection Molding and Electronic Manufacturing Services. Their client base encompasses a wide range of industries, including communication, healthcare, and automotive. Currently, the top five largest clients account for only 65% of the revenue, resulting in a low concentration risk for CPI. As a proficient player in the EMS sector, CPI exports its products worldwide, with approximately 45% of its revenue derived from exports, serving clients in the US, Europe, and various other regions.

Management guided that CPI remains one of the largest contributors to KPS's earnings. This is noteworthy, considering that CPI experienced a softer revenue performance in the 1H23, with a YoY decline of approximately 9% to RM99.4mn, primarily attributed to subdued external demand. Nevertheless, we maintain a positive outlook on its mediumterm prospects, as we anticipate CPI to capitalize on the ongoing shift in the global supply chain, diverting away from China due to heightened geopolitical risks. In summary, we anticipate a more favourable fiscal year for CPI during 2024 compared to 2023, driven by marginal demand recovery and an expanding client base.

Gradual KPS Recovery is Likely in FY25F Onwards

There are several challenges that affect KPS’s earnings currently namely (i) a slowdown in demand for consumer electronics products, (ii) costs pressures stemming from the hike in electricity tariffs as well as an increase in labour costs, and (iii) the recent departure of customers from KPS’s manufacturing subsidiary; Toyoplas Manufacturing (Malaysia) Sdn Bhd as well as King Koil Manufacturing West LLC. Note that the largest customer for Toyoplas in the Indonesian market, which previously accounted for approximately 30% to 40% of its revenue, has ceased placing orders.

As such we maintain our FY23F earnings assumption but reduced FY24-FY25F earnings forecast by 14.7%-21.9% as we foresee various near-term headwinds to weighed KPS earnings, particularly due weaker demand. Nonetheless, amid these challenges, we anticipate that KPS will experience a gradual earnings recovery, commencing in FY25F onwards, primarily driven by the growth contribution from MDS and CPI. Additionally, the group maintains an optimistic outlook on monetizing its assets, aligning with its strategic business plan to further expand its presence in the EMS industry.

Maintain a HOLD call, at higher TP of RM0.77

We maintain our recommendation on KPS with a HOLD call, with a higher TP of RM0.77 (RM0.63 previously) as we changed our valuation methodology to sum-of-part (SOP) from P/B valuation. Our current TP implies FY24F PER of 20.3x and FY24F P/B of 0.4x.

Source: BIMB Securities Research - 25 Sept 2023