KPS’s 1HFY23 results disappointed on weak orders and elevated input cost. Its top line was hit by the slowdown in the global E&E sector and the loss of orders from a key customer. We cut our FY23-24F earnings by 70% and 16%, respectively, lower our TP by 15% to RM0.51 (from RM0.60) and reiterate our UNDERPERFORM call.

Below expectations. KPS’s 1HFY23 core net profit of RM1m disappointed, coming in at only 4% of both our full-year forecast and the full-year consensus estimate, respectively. The variances against our forecast came largely from the general slowdown in orders, the loss of orders from customer T but higher cost of inputs including labour, electricity and certain materials.

Results’ highlights. YoY, its 1HFY23 revenue fell 12% mainly due to subdued performance in its core businesses, namely the manufacturing and licensing segments. While the manufacturing segment continued to contribute the lion’s share of revenue, it faced a 16% contraction given the cessation of key customer from Toyoplas and KKMW coupled with the weaker consumer demand. Notably, the licensing segment saw a steep 56% fall as a result of the absence of one-off upfront royalty payments. Its core net profit tumbled by a larger 90%, weighed down by lower sales order and higher finance costs.

QoQ, it returned to the black in 2QFY23 from losses mainly driven by the higher orders from E&E clients and lower resin prices and shipping costs.

Outlook. We find KPS’s guidance for the drop in the demand for its products having bottomed out a tad too optimistic. We are more inclined to believe that its sales will continue to be dampened by high inflation and the slowdown in the global economy particularly in China. Adding salt to the wound, are the high costs of labour and energy. On a brighter note, its recent acquisition of precision metal component manufacturer MDS Advance Sdn Bhd (MDS) will bolster its high-margin product offerings.

Forecasts. We reduce our FY23-24F net profit by 70% and 16%, respectively. This adjustment is mainly due to the still ongoing weak demand from E&E clientele and the loss of orders from customer T, in addition to the challenges posed by elevated input costs (labour and electricity costs).

Consequently, we reduce our TP by 15% to RM0.51 (from RM0.60) based on an unchanged 10x FY24F PER, which is in line with 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 acknowledge its hard-earned role in the supply chain of Customer D, a renowned privately-owned innovator of high-tech consumer electronic appliances and its long-term growth prospects underpinned by various expansion plans. However, over the immediate term, it will not be spared the significant slowdown in the global consumer electronics industry and it is also struggling to contain rising cost. Maintain UNDERPERFORM.

Risks to our call include: (i) a stronger-than-expected recovery in the consumer electronics sector, (ii) easing of input costs, and (iii) consistent renewal of contracts by key clients.

Source: Kenanga Research - 29 Aug 2023