KPS guided for flattish earnings growth in FY23-24. Although earnings visibility is well supported by new EMS contracts in excess of RM450m, demand for its auto parts remains affected by the global supply-chain disruptions. We maintain our forecasts, TP of RM0.70 and MARKET PERFORM call.

The key takeaways from KPS’s post-results briefing are as follows:

1. KPS guided for flattish earnings growth in FY23-24. On one hand, earnings visibility is well supported by new EMS contracts (consumer electronics) in excess of RM450m which was secured last year. On the other hand, the global automotive supply-chain disruption is still far from being resolved despite the recent China’s reopening (largely due to the shortage of ICs), affecting the demand for KPS’s auto parts such as climate box-build radio, sensor holder and speedometer. The prospects of KPS securing more consumer electronics EMS contracts are also clouded by the slowdown in consumer spending globally.

2. KPS is anticipating higher operating costs in FY23 driven by steep hike in electricity tariff of >40% averagely for medium and high voltage users. Historically, utilities cost made up <5% of the total production cost. However, KPS is actively managing and maintaining optimum headcount and manpower as well as consolidating operations to streamline processes to improve efficiency.

Forecasts. Maintained.

We also maintain our TP of RM0.70 based on 10x FY23F PER, 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 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. Maintain MARKET PERFORM.

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 - 1 Mar 2023