KPS is acquiring a 100% stake in precision component maker MDS Advance Sdn Bhd (MDS) from two individuals for RM85m cash, translating into FY23F (Dec) and FY24F PERs of 10.6x and 9.4x based on a net profit guarantee of RM8m and RM9m over the respective two years. We are positive on the acquisition which provides synergy and is earnings-accretive. We raise our FY23F core net profit by 9%, lift our TP by 10% to RM0.85 (from RM0.77) and maintain our OUTPERFORM call.

KPS is acquiring a 100% equity stake in MDS from two individuals for RM85m cash. MDS is primarily engaged in the manufacturing of precision metal components. It offers high-precision computerised numerical control metal machining encompassing metal cutting and milling. The acquisition comes with a net profit guarantee of RM8m and RM9m for FY23 and FY24, respectively, and is expected to be completed by end-1QFY23.

The deal values the asset at 10.6x and 9.4x FY23F and FY24F PERs, which are fairly consistent with the forward PER of the manufacturing sector of 10x (which is also our target forward PER for KPS).

The acquisition will raise KPS’s net debt and gearing of RM117m and 0.1x as at end-3QFY22 to RM203m and 0.2x, respectively, which are still highly manageable.

We are positive on the deal as it will strengthen the group’s core manufacturing business and allow it to move towards higher margin product mix. As MDS and KPS share similar key clients, the integration would allow the group to expand its product offering to these clients and boost business dynamics. Hence, we believe the acquisition fits its long term business strategy and expect enhancement in overall business efficiencies as well as cost optimisation within its manufacturing segment.

Forecasts. We raise our FY23F earnings by 9% to reflect the earnings enhancement from the acquisition.

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 raise our TP by 10% to RM0.85 (from RM0.77) based on 10x FY23F PER, 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 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 - 2 Dec 2022