We remain optimistic on KPS following a visit to its engineering thermoplastic (ETP) plant in Penang parked under wholly-owned unit, CPI (Penang) Sdn Bhd (CPI). CPI guided for subdued earnings in FY22 mainly due to the global electronic chip shortage and high input costs. On a brighter note, it has been able to secure more orders from both existing and new customers. We maintain our forecasts, TP of RM0.77 and OUTPERFOM call.

We visited CPI’s ETP plant in Bayan Lepas (see image on the next page) last Friday. The plant contributes about 90% of CPI’s total turnover (with the remaining 10% from a smallish EMS plant). Its core competences are injection moulding, insert moulding, 3D printing, heat staking, polymer design and development.

The key takeaways from the visit are as follows:

1. CPI has been able to secure more orders from both existing and new customers, which is a testimony to its strong product and service quality. Also lending credence to this is that it counts a renowned privately-owned innovator of high tech consumer electronic appliances in its client list.

2. CPI has resolved its labour shortage issue, having already obtained the approval from the authority to bring in a total of 200 foreign workers in three batches. The first batch will arrive by this month which will boost its utilisation rate from 70% to 75-80%, while the remaining batches are expected to arrive next year.

3. CPI guided for subdued earnings in FY22 mainly due to the global electronic chip shortage and high operating costs, particularly, labour cost (following the increase in the minimum monthly wage to RM1,500 from RM1,200 starting May 2022) and the cost of inputs such as polycarbonate (PC) and acrylonitrile-butadiene-styrene (ABS). These are partially mitigated by gains from a stronger USD vs. the ringgit as 80% of CPI’s total sales are denominated in USD. We have reflected these in our forecasts.

We like KPS for: (i) the strong growth prospects of the consumer electronics industry which is the main client of its products and services, (ii) its long-term growth underpinned by expansion at its overseas operations, and (iii) the greater role it is playing in the supply chain of a renowned privately-owned innovator of high tech consumer electronic appliances. We maintain our forecasts and TP of RM0.77 based on FY23F PER of 10x, which is in line with the average forward PER of manufacturing sector: There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 5). Maintain OUTPERFORM.

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

Source: Kenanga Research - 7 Nov 2022