Results

• Kronologi Asia Berhad posted RM63m of revenue in its 1QFY24 results, which grew 9.9% yoy but dropped 40.6% qoq. The better yoy revenue performance was mainly boosted by the strong growth from operations in China.

• Lower net profit. In 1QFY24, Kronologi reported a net profit of RM2.6 million, reflecting a decline of 79.5% QoQ, but a growth of 15.3% YoY. The QoQ decrease in profit can primarily be attributed to seasonality factors. However, the YoY growth in profit is primarily driven by higher revenue and an expansion of the profit margin attributed to the increased contribution from the enterprise data management (EDM) as a Service segment, which offers better profit margins.

• Higher selling and distribution cost. Krono has posted higher selling and distribution expenses in the quarter which surged +56% qoq and +92.3% yoy. We believe it is the result of the management's focus on capturing market share.

• 1QFY24 profit within expectation. The 1QFY24 results are in line with our expectations, although the net earnings of RM 2.6 million accounted for only 11% of our full-year FY24 earnings forecast. This is consistent with the seasonally slow results of the first quarter. However, we anticipate that earnings will pick up in the remaining quarters, particularly in the second half of FY24.

• EDM Infrastructure Technology (IT) segment. EDM IT segment posted RM44.8m in revenue (+3% qoq/-47% yoy) and RM2m in PAT (+750% qoq/ -185% yoy) in 1QFY24. The segment continues to dominate the Group’s total revenue contribution, contributing 71% of total revenue in the quarter despite coming in lower than previous quarter’s 80% contribution.

• EDM As-A-Service (AAS) segment. The segment registered RM18.2m in revenue (-15% qoq and +33% yoy) and RM1.5m ni PAT (+29% qoq and +88% yoy) during the quarter. In the quarter, the AAS segment margin increased qoq and yoy mainly due to lower tax.

• Geographical segment. Majority of the Group’s revenue came from Singapore and China during the quarter (accounting for 36% and 35% of total revenue respectively) (-34% qoq ,- 8% yoy and -13% qoq ,+108% yoy respectively ), followed by Philippines (20% of total revenue) (-56% qoq but -4% yoy).

Comments/Outlook

• Pleased to see growth in the AAS segment. The AAS segment posted a stellar growth where quarterly PAT grew +29% qoq and +88% yoy and we deem it as a good sign to the Group as the segment provides a more sustainable income and better margin.

• Cautious on China’s operation in near term… Despite the operation in China posting a stellar result in the quarter (+108% yoy), we are turning more cautious in the near term due to the slower-than-expected economic recovery in China.

• … but still positive on the long-term growth. Nevertheless, we are still optimistic on the long-term growth prospects of Krono especially on the China operation supported by the growth in EDM AAS business and on-going supply chain relocation.

• Focus in serving Asia market to mitigate risk amid global economic headwinds. IMF has recently upgraded the Asia’s economy to grow average of 4.6% (4.3% previously) in 2023 thanks to the accelerating pace of growth, which will be a "bright spot" in an otherwise bleak global economic landscape. As Krono focuses in serving the Asian market, it is anticipated that the Group will capitalize on the region's economic growth to well positioned during the global economic downturn.

Earnings Outlook

• We are keeping our FY24F net earnings forecast at RM 23m and FY25F net earnings forecast at RM 27.8m.

Valuation / Recommendation

• We maintain our BUY call with unchanged target price of RM0.64. Our target price is pegged at 17x PER (which is -0.5 stdv based on its 3-year mean of PER) on the EPS 3.8 sen of FY25F. Our target price has adjusted to account for the changed of shares base after new issuance of shares.

• Our target price is rendering a 19% upside from current share price of RM 0.54.
• We favour the stock due to: Gaining traction in sustainable income; Promising industry outlook driven by digitalized data era; Robust balance sheet minimize risk amidst downturn economic.
• Bonus Issue. The board has proposed a bonus issue of new shares and warrants based on the ratio of 1:5 on April. We will adjust our update EPS and target price accordingly in response to these changes on the effective date.

Source: JF Apex Securities Research - 28 Jun 2023