We initiate coverage on KPS with an OUTPERFORM call and target price (TP) of RM0.77 pegged to 10x FY23F PER. We like KPS for its diversified portfolio of products, expansion in its overseas operations and the greater role it is playing in the supply chain of a global consumer appliances giant. We project its FY23F net profit to grow by 14% as global supply chain disruptions ease, enabling it to reap the full benefits of its expansion plans.

Kumpulan Perangsang Selangor Bhd (KPS) is a Selangor state owned company engaged in manufacturing (>60% of group operating profit), trading, licensing, and infrastructure. The manufacturing division produces plastic-based EMS products in the communications, IT and consumer electronic segments, as well as industrial and automotive components along with integrated printing and packaging. The trading division specialises on sewage and water treatment consumables and the worldwide licensing of the King Koil brand mattresses.

Earnings from manufacturing should remain core. We expect continual order uptrend for electronic products due to growing pace of digital transformation worldwide. The US-China trade tension and the desire by MNCs for greater supply chain resilience are also favouring manufacturers in South East Asia such as Malaysia but also Vietnam and Indonesia where KPS operates. Latest statistic showed that Malaysia’s Industrial Production Index (IPI) grew 12.5% YoY in July driven by manufacturing sector of which E&E products contributed 17.3%. Furthermore, as the region progresses towards post COVID-19 norms, the utilisation levels of its various plants have risen from around 50% to 60%.

Plant expansion is also expected to boost prospective earnings. A new 130,000 sg ft plant in Bac Giang Province Vietnam is due to start in 4QFY22. It is four times the size of Toyoplas’ existing plant in Bac Ninh Province. Importantly, it will not only accommodate customers’ shifting some products away from China to Vietnam but will also increase Toyoplas’ capacity and enable it to optimise cost and improve margins. Another key subsidiary, CPI, is also expected to commence operation of a new Penang EMS facility by 4QFY22. It will add 30% more capacity to support sustainable topline growth in the coming years.

We initiate coverage with an OUTPERFORM call. We like KPS for its: (i) diversified portfolio of products, catering to both the industrial and consumer electronics space, (ii) long-term growth underpinned by expansion in its overseas operations, and (iii) the greater role it is playing in the supply chain of a global consumer appliances giant (that will raise its profile as a contract manufacturer in the international market). We value KPS at RM0.77 based on FY23F PER of 10x, which is in line with the average forward PER of the manufacturing sector. There is no adjustment to our target price based on ESG given a 3-star rating as appraised by us (see Page 11).

Risks to our call include: (i) the global economy slipping into a sharp slowdown or recession, hurting demand for manufactured products, (ii) labour shortage and escalating input costs, and (iii) termination or non-renewal of contracts by key clients, resulting in both financial and reputational loss.

Source: Kenanga Research - 29 Sept 2022