· One-stop technology solution provider positioned at the high value end. K-One Technology (K1) is an integrated total one-stop technology solution provider with core activity in design, development, industrialisation, final assembly and quality testing of electronic end products. Being a pioneer in products design and development for world-renowned customers in the fast growing business sectors (such as mobile phone accessories and consumer technology products), it positions itself at the high value-end of the manufacturing chain which is low capital, non-labour intensive and asset-light with high intellectual capital, differentiating itself from the typical Electronic Manufacturing Services. Segmental-wise, the lion’s share revenue contributors are divided equally among: (i) consumer technology products (30%), (ii) mobile phone accessories (30%), (iii) computer peripherals (30%), and automotive and industrial products contributing the remaining 10%.
· Started on a clean slate in 2H2013. Leaving behind two consecutive years of losses in FY11 and FY12, K1 had started to turn around since 3Q13. With major restructuring efforts such as: (i) divestment of its lossmaking businesses, (ii) rebalancing of customer product mix, (iii) better cost management, and (iv) new customers and products development, K-One had in 9M14 reported a decent core net profit (NP) of RM8.5m (vs. core net losses of RM4.2m in 9M13) on the back of: (i) higher revenue growth by 10% and (ii) higher EBIT margin of +6.8ppts due to better product mix and better operational efficiency.
· Resilient earnings prospects in FY15. Notably, the group had on 4Q2014 been awarded new orders worth c.RM20m from a worldrenowned multinational corporation to manufacture high-end communication accessories for sales and distribution globally. This compliments its mobile phone accessories segment which are currently benefitting from the strong wave of the smartphone/tablet upcycle. On top of that, we understand this could also open doors of opportunity for winning potentially 4-5x bigger size orders from another global brand customer. On top of that, we also gather that the group is seeing healthy demand from its existing core customers, together with the earnings contribution from new wearable products from new clients in medical and healthcare industries.
· Stronger balance sheet post transformation. Currently, K1 is sitting on a net cash balance of RM10.7m as compared to a net gearing of 0.06x a year ago. Note that the group has yet to declare any dividend in the past three years to conserve cash in lieu of the gestation period. However, management cited the possibility of forming dividend policy in the future should the group maintains its decent financial performance. We do not rule out the possibility judging from the current strong net cash in the absence of major capex (capex for FY14 and FY15 only at c.RM2m each year respectively). We have yet to forecast any dividends for now, to be on the conservative side.
· Trading Buy with a Fair Value of RM0.63. All in, we are projecting the group to register core NP of RM12.2m in FY14E, followed by a robust NP of RM21.6m in FY15E, with key earnings assumptions of: (i) organic growth of 10% across all its segments, (ii) new orders of c.RM20m from the manufacturing of high-end communication accessories, and (iii) GP margins of 13%-14.5% (YTD14 GP margin at 13.4%) on the back of better product mix. We value K1 at RM0.63/share based on: (i) 10x FY15E PER, a valuation which is broadly in line with FBM Small Cap fwd PER and (ii) an excess cash of 5.3 sens/share after we deduct the opex and capex requirements in FY15, with investment merit being a robust 2-year NP CAGR of 361%, which offers a total capital upside of 24%.
Source: Kenanga
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