Management anticipates strong turnaround amid diversification into a more balanced product portfolio with the IoT, healthcare/medical and automotive markets, contributing improved margins and longer term stability due to longer product life cycles. Moreover, K1 is expected to capture higher loading from current clients as well as new products by new clients (benefiting from the US China trade impasse). Lastly, K1’s transformation towards the Industry 4.0 and cloud computing will allow it to stay relevant, competitive and sustainable for long term growth. At RM0.23, the stock is trading at undemanding 16.8x FY19E P/E (36% lower than its peers), supported by a solid 51% EPS FY18-20 CAGR and net cash of RM51m or RM0.07/share, which will be useful for the anticipated impending sales growth and future acquisition of synergistic technology-based and the Industry 4.0 ecosystem businesses. Technically, the long term bullish rounding bottom formation is expected to drive K1 higher towards RM0.24-0.285 in the mid-to long term.

Turnaround via diversification and reinvention. K1 is principally engaged in the research, design, development and manufacture of IoT (Internet of Things) gadgets, healthcare/medical devices, automotive aggregates, electronic security/surveillance devices, computer peripherals, electronic headlamps, consumer electronic lifestyle gadgets, floor-care and industrial products. Since inception in 2001, more than 90% of its business are exported to Europe, US and various countries in Asia. Overall, we believe USDMYR trend to stabilize at the RM4.05-4.15 range, which may provide comfort to the Group in conducting orderly business.

Digital transformation towards Industry 4.0. The Group’s primary EMS (electronic manufacturing services) business had witnessed an increasing shift towards products which are IoT enabled over the last couple of years. In addition, at the backend, the Group has been transforming its manufacturing hub towards smart manufacturing as part of its Industry 4.0 attainment, so that it can maintain its competitiveness by automating processes to reduce costs and improve productivity.

Expect a better 2H19. Following the complete exit from the highly competitive mobile phone accessories segment in FY19, K1 is poised to take advantage of new opportunities arising from its re-balancing of over the last couple of years on “sunrise” industries which include high-margins products such as medical/healthcare devices, IoT devices, automotive aggregates, industrial products and electronic security/surveillance solutions with higher margins and longer product life cycles, where K1 is seeing traction in these “sunrise” industries and expects them to pick up momentum from 2H19 for long term growth.

Meanwhile, the diversification into the cloud computing business through the acquisition of 60% equity interest in GAP (completed in March 2019) is anticipated to generate impactful business from 2H19 and beyond, with strong underlying growth with cloud migration and consumption with potential clients in Asia-Pacific and Oceania. Overall, the cloud computing is envisaged to complement smart manufacturing and all other elements supporting Industry 4.0 (the software element).

Long term bullish rouding bottom formation. The weekly rounding bottom formation is a long-term reversal pattern represents a long consolidation period that turns from a bearish bias to a bullish bias. We believe K1 is ripe from a technical reoubnd from a steeply oversold position. A decisive downtrend line breakout above RM0.24 from YTD high of RM0.285 (25 Apr) could spur prices higher to RM0.27 (weekly upper Bollinger band) before reaching our LT objective at RM0.285. Key supports are RM0.22 (38.2% FR) and RM0.215 (weekly lower Bollinger band). Cut loss at RM0.205.

Source: Hong Leong Investment Bank Research - 23 Jul 2019