KPS’s 9MFY22 results came in within expectations. The results are consistent with our projection of a soft FY22 as the demand for consumer electronics came off its pandemic-induced peak, coupled with supply-chain disruptions and shortages of integrated circuits. However, the situation will improve significantly in FY23. We maintain our forecasts, TP of RM0.77 and OUTPERFORM call.

Stronger 4Q ahead. 9MFY22 core net profit of RM24m came in at only 68% of both our full-year forecast and the full-year consensus estimates. However, we consider the results within expectations as we expect a bumper 4QFY22 due to the year-end shopping season that will boost demand for consumer electronics. It declared a special dividend and first interim NDPS of 4.5 sen and 2.0 sen, respectively.

A soft patch in 9MFY22. YoY, 9MFY22 revenue jumped 5% driven by the sale of water chemicals and water meter from trading segment as well as excess licensing revenue from international licensees coupled with upfront payment made by existing customers for renewal of long term licensing agreement.

However, 9MFY22 core net profit dropped by 7% due to lower share of profit from associates (mainly from SPRINT’s one-off traffic volume adjustment of RM3m) and higher input costs (i.e., resin cost and wages), eroding its margins.

Forecasts. We maintain our forecasts that projected FY22F net profit to contract 13% on a flattish turnover as the demand for consumer electronics has came off its pandemic-induced peak, coupled with on going supply-chain disruptions due to lockdowns in China arising from Beijing’s zero-Covid policy as well as shortages of materials including integrated circuits. However, we expect the situation to improve significantly in FY23, spurring a 14% growth in net profit on the back of a 5% increase in turnover.

We continue to like KPS for: (i) it being a strong proxy to the resilient global consumer electronics industry on rising affluence especially in developing countries, (ii) it being a beneficiary of the diversification of MNCs away from China to South-East Asia as KPS operates in Malaysia, Vietnam and Indonesia, 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 TP of 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 TP based on ESG given a 3-star rating as appraised by us (see Page 4). 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 - 29 Nov 2022