KPS’s FY22 results disappointed on subdued demand for consumer electronics EMS, and miscellaneous restructuring costs. Its immediate term outlook remains tepid without a strong rebound from its EMS customers in consumer electronics and household products, worsened by IC shortage due to lingering supply-chain disruptions. We cut our FY23F earnings by 28%, reduce our TP by 18% to RM0.70 (from RM0.85) and downgrade our call to MARKET PERFORM from OUTPERFORM.

Below expectations. FY22 core net profit of RM28m missed our forecast and consensus estimate by 23% and 13%, respectively. The main variance against our forecast came from lower sales at its manufacturing segment due to subdued demand in consumer electronics, and higher administrative expenses mainly from the one-off cost associated with its corporate restructuring in China, Indonesia, and Vietnam.

Results’ highlights. YoY, FY22 revenue grew a marginal 2%. Sale of water chemicals and water meter from its trading segment as well as excess licensing revenue from international licensees were offset by lower revenue from its manufacturing segment due to global chip shortage.

Despite higher revenue recorded in FY22, core net profit fell 36% due to the higher operating expenses and one-off cost associated with the corporate restructuring in China, Indonesia, and Vietnam from Toyoplas.

Outlook. Looking ahead, we expect moderate demand for its existing products on weaker consumers demand as high inflation erodes spending power. Besides, the macroeconomic uncertainties and lingering supply-chain disruptions as well as shortages of materials including integrated circuits will translate into softer quarters ahead.

Forecasts. We cut our FY23F earnings by 28% to reflect a more tepid outlook in global consumer spending and IC shortages, while introducing new FY24F numbers with earnigns projected to grow at 13%.

We reduce our TP by 18% to RM0.70 (from RM0.85) based on unchanged FY24F 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).

We continue to like KPS for: (i) the long-term growth prospects of the global consumer electronics industry, translating to demand for EMS, (ii) its long-term growth underpinned by overseas expansion, and (iii) its greater role in the supply chain of a renowned privately-owned innovator of high-tech consumer electronic appliances. However, its earnings prospects over the immediate term are tepid amidst the uncertain global economic outlook. We downgrade our call to MARKET PERFORM from 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 - 28 Feb 2023