KPS’s 9MFY23 results beat our forecast but disappointed the market. Its 3QFY23 core net profit jumped 1.6x QoQ on a pick-up in orders from its E&E customers, coupled with lower resin and freight costs. KPS’s recovery path will remain bumpy on the back of a soft global economy. We raise our FY23F earnings forecast by 11% but maintain our TP of RM0.51 and UNDERPERFORM call.

Above expectations. KPS’s 9MFY23 core net profit of RM7m beat our expectation, already meeting our full-year forecast, but disappointed the market at only 64% of the full-year consensus estimate. The key variance against our forecast came largely from lower-than-expected cost of input resin.

Results’ highlights. YoY, its 9MFY23 revenue dropped 12% largely due to a 16% top line contraction at its manufacturing segment weighed down by weaker consumer demand and the cessation of its major customer in Indonesia. Additionally, the licensing segment experienced a significant 56% decline in revenue in the absence of one-off upfront royalty payments. However, its core net profit plunged by a steeper 70% on higher operating cost (i.e. labour and electricity) and finance cost.

QoQ, its 3QFY23 core net profit more than doubled mainly due to the pick-up orders from its E&E customers coupled with lower resin and freight costs.

Outlook. The current average plant utilisation rate for KPS stands at approximately 50%, significantly below its optimal threshold of 70%. Moving forward, KPS’s operating condition will remain challenging due to the slowdown in the global economy, particularly China. Not helping either, are elevated labour and energy costs. KPS believes it will be more realistic to expect a recovery in 2HFY24 mainly underpinned by low inventory levels of its customers. Meanwhile, the recent acquisition of precision metal component manufacturer MDS Advance Sdn Bhd (MDS) will add high-margin product offerings to its portfolio.

Forecasts. We raise our FY23F earnings forecasts by 11% to reflect lower resin cost while keeping our FY24F numbers.

However, we maintain our TP of RM0.51 based on an unchanged 10x FY24F 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 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 the 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) recurring contract renewals by key clients.

Source: Kenanga Research - 28 Nov 2023