Results

• Kronologi Asia Berhad (Krono) posted RM57.3m revenue in its 1Q23 performance which dropped 42.4% qoq and 2.5% yoy. The sluggish performance was mainly due to plummeting EDM infrastructure sales in Philippines stemming from the slower technology investment by the client of the Group. This was mainly caused by lengthy supply chain disruption and geopolitical issues leading to lower business confidence.

• Lower profit and margin. Krono registered RM2.2m of PATAMI in 1Q23 (-66.5% qoq and -44.9% yoy) with profit margin dropped 2.8ppts qoq and 3ppts yoy no thanks to the rising operational costs pursuant to consolidation of the Quantum China’s operation and a higher marginal tax rate during the 1Q23.

• Performance missed expectation. The PATAMI of RM2.2m is below our in-house forecast as the 3M23 profit only accounts for 10% of our full year forecast. This is mainly due to the drop of sales in Philippines and margin under pressure in China operation.

• China’s operation dragged by partial lockdown. Krono’s key market – China operation posted RM10.7m revenue (-60% qoq) mainly dragged by the partial lockdown which caused the delays in production and delivery of components for the operation of the Group. Meantime, the lockdown restricted the movement of the employees and caused delay of project and product delivery.

• Flattish QoQ EDM As-A-Service sales performance. The Group registered RM13.7m revenue in the business segment (+12% yoy and 0% qoq). However, the margin was pressured by the higher operational cost (-4.9ppts qoq and -2.4ppts yoy).

• Better performance in Singapore segment. Singapore segment posted RM24.4m revenue during the quarter which grew 19% qoq and 38% yoy. Meanwhile, Singapore segment is the main contributor to the Group in the quarter which accounted for 42.5% of the total revenue.

Comments/Outlook

• China lockdown brings uncertainties of profit growth in FY2023…… The partial lockdown in China affected the operation of the Group in China due to delay and deferrals of project by Krono and led to uncertainties of financial growth of Quantum China Limited.

• …… Still optimistic on the recovery for 2HFY23. Following the easing of the containment measurement by the Chinese government in most of the areas such as Shanghai started from June, we believe the sales momentum will be gradually picking up for the remaining quarters of the financial year.

• Robust balance sheet and healthy cash reserves. During the quarter, the Group registered RM119.7m of cash (4Q22: RM117.6m) and 0.29x of debt ratio. With the robust of balance sheet, the Group is able to seize any investment opportunities arise and expanding the business size in the future.

• Low debt ratio mitigate risk on global interest rate hike resulted from inflation. The 0.29x of debt and gearing ratio shelter the Group of any default in repayment of debt and pressure of high interest expense.

• EDM As a Services business cushions the risk of economic uncertainties. EDM As A Services business provides a stable and recurring income as the business is able to generate more sustainable income streams with subscription base of the customers. This shall mitigate the risk of Global economic uncertainties.

• Business is expected to ride on the growths of Asian economies. According to Asian Development Bank, the Asia’s economy is estimated to grow at 5.2% in CY22 and 5.3% in CY23, underpinned by robust recovery in domestic demand and continued expansion in exports amid the global uncertainty. As Krono’s businesses are across Asian countries, we are optimistic of its future prospects, riding on the robust growth of Asian economy.

Earnings Outlook

• We slash our FY23F revenue and profit forecast to RM349.3m and RM21.8m (from RM367.2m and RM26.3m respectively) as the earnings of 1Q23 miss expectation and take into consideration of the global economic uncertainties. However, we keep our FY24F revenue and earnings forecast at RM395m and RM27m respectively on the back of recovery of the Group’s China business and higher revenue mix of EDM AAS’ recurring income.

Valuation & Recommendation

• We maintain BUY call on the Group but a lower target price of RM0.56 following our earnings downgrade in Krono. Our valuation is pegged at 19x FY23F EPS of 3.0sen based on its 3-year mean PER. Our target price renders 24% upside from current share price of RM0.455.

Source: JF Apex Securities Research - 23 Jun 2022