KPS is divesting a 50% stake in bedding product maker Kaiserkorp Corporation Sdn Bhd (Kaiserkorp) for RM265.5m cash, resulting in gains of RM117.4m or 21.8 sen/share. Unless KPS reinvests the cash proceeds in businesses with high returns, the exercise will be earnings dilutive. We cut our FY24F earnings forecast by 21%, reduce our TP by 12% to RM0.45 (from RM0.51) and maintain our UNDERPERFORM call.

KPS is divesting a 50% equity stake in Kaiserkorp to AI Dream (HK) Ltd for RM265.5m cash, reducing its stake in the maker of bedding products to 10% from 60%. The disposal is expected to be completed by Mar 2024.

The deal values the asset at 22x FY23F PER, which is at a 10% premium to the average forward PER of the comparable international companies of 20x (Leggett & Platt, Incorporate and Tempur Sealy International, Inc). KPS will realise RM117.4m gains from the disposal, translating to 21.8 sen/share. It has earmarked RM24.2m for a special dividend, translating to 4.5 sen/share.

The exercise will boost KPS’s net cash of RM20m as at end-3QFY23 to RM194.5m, after reflecting the deconsolidation of RM65.9m cash sitting in Kaiserkorp, related disposal expenses, and the special dividend payout.

Unless KPS reinvests the cash proceeds in businesses with high returns, the exercise erodes our FY24F net profit forecast by 21% as the loss of net profit contribution to the tune of RM12m per annum from Kaiserkorp is only partially cushioned by RM5.2m net interest income from the additional cash. For this reason, we are at best only neutral on the deal.

Forecasts. We keep our FY23F net profit forecast but cut our FY24F number by 21%.

Consequently, we cut our TP by 12% to RM0.45 (from RM0.51) based on 10x revised FY24F EPS of 4.0 sen (in line with the average forward PER of the manufacturing sector) plus the 4.5 sen special dividend. 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. 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) consistent renewal of contracts by key clients.

Source: Kenanga Research - 10 Jan 2024