Results

• Kronologi Asia Berhad posted revenue of RM63.1m in 2Q23 which grew 10.1% qoq but drop 15.3% yoy. The sluggish yoy performance was mainly due to the decline in EDM infrastructure sales. This was resulted from slower infrastructure investment by its clients, mainly caused by uncertainties in global economy and supply chain disruption.

• Lower yoy profit and margin. Krono registered RM3.1m of PATAMI in 2Q23 (+40.3% qoq and -39.2% yoy) with profit margin dropping 1.9ppts yoy due to higher finance cost and depreciation of PPE arising from investment in infrastructure equipment.

• Performance missed expectation. The 1H23 PATAMI of RM 5.3m is significantly lower than our internal forecast, as the 1H23 profit accounts for only 25% of our full-year forecast. This is mainly due to the impact of lower infrastructure investment by the customers, which is much slower than we thought.

• Positive momentum in EDM As-A-Service (AAS) segment. The Group has registered RM15.4m revenue (+12% qoq and +51% yoy) and RM2.1m PAT (+158% qoq and +38% yoy) in the quarter. We can see the momentum has been picking up in the segment and deem it as a good sign to the Group as the segment has been providing more sustainable income.

• Recovery of China’s performance aided by the economic reopening. Krono’s key market – China’s operation posted RM17.4m in revenue (+62% qoq and +90% yoy) in the quarter, mainly supported by the easing of containment measurement in China, benefiting the EDM As-A-Service business.

Comments/Outlook

• Slowing down of China’s economy posed downside risks for FY23 and FY24. The weakening of China’s economy amid renewed coronavirus outbreaks and slower exports, has signalled a cloudy outlook on China’s economy. The uncertainty on the economy has posed a headwind on operations of Quantum China Limited.

• Cautiously optimistic that EDM AAS's positive momentum  will continue. The management is on track of transforming the  Group from current high revenue mix of EDM Infrastructure  Technology (EDM IT) into a more EDM AAS sales mix through  investment in equipment and strategic collaboration with industry  giants. We are expecting more profit contribution from the AAS  segment moving forward. Meanwhile, the AAS business is able to  generate more sustainable income stream with subscription-based  customers. This will mitigate some of the risks amidst  uncertainties in the global economy currently.

• Robust balance sheet in a downturn economic. During the  quarter, the company registered RM 91.3m of cash (1Q23:  RM119.7m) , RM 46.3m total debt (1Q23: RM 46.3m) and 0.28x  of debt ratio. With a robust balance sheet, the Group is able to  minimize its risk during the economy downturn. 

• Low debt ratio mitigates risk on the backdrop of global  interest rate hiking pressure by inflation. The 0.28x of debt  and gearing ratio has mitigate the Group’s default risk in debt repayment and any pressure by high interest rate.

• Rising labour cost potentially eroding profit margin. The  wage/labour cost growth is accelerating this year, alongside  inflation and intensifying competition for talent. Based on our  understanding, labour costs account for 60-70% of Kronologi's  total operating costs. The rising cost of labour has posed a  downside risk to the profit margin of the Group.

Earnings Outlook

• We slash our FY23F revenue and profit forecast to RM  15.9m (from RM 349.3m and RM 21.8m). Also, we tweak  down our FY24F revenue and earnings forecast to RM 290m  and RM 23m respectively (from RM 395m/RM27m) after cutting our forecast on the EDM Infrastructure segment after taking  consideration of slower technology-led deployment by the  customers amid global economic uncertainties.

Valuation / Recommendation

• We maintain our BUY call with unchanged target price  on RM 0.56 despite having downgraded our earnings forecast as we rollover our valuation to FY24F. Our  valuation is now pegged at 17x (which is -0.5 stdv based  on its 3-year mean of PER) (19x previously). We lower  our PER due after taking into consideration global  economy uncertainties and slowing down of China’s economy.

• Our target price is rendering a 14% upside from current  share price of RM 0.49.

• We favour the stock for: The company is gaining traction in  sustainable income; Promising industry outlook driven by  digitalized data era; Robust balance sheet minimize risk amidst  downturn economic.  

Source: JF Apex Securities Research - 22 Sept 2022