KPS’s FY23 results disappointed due to its inability to effectively contain costs. Its FY23 core net profit plunged 85% on a doublewhammy of the slowdown in the global consumer electronics sector and rising input cost. We believe a recovery is more likely to happen in 2HCY24, at the earliest. We maintain our forecasts, TP of RM0.45 and UNDERPERFORM call.

KPS’s FY23 core net profit of RM4m missed our forecast and consensus estimate by 48% and 54%, respectively. The key variance against our forecast came largely from higher-than-expected cost of inputs.

YoY, its FY23 revenue fell 10% dragged by subdued performance namely, manufacturing segment (-16%), licensing segment (-56%) and property investment (-7%) but partially offset by its trading segment (+4%). The manufacturing segment, the largest revenue contributor, suffered from its customers refraining from replenishing their inventories in response to a subdued consumer electronics market, and the loss of a major customer, i.e. Customer T, in Indonesia. Additionally, the revenue in its licensing segment declined, attributed to the absence of one-off upfront royalty payments.

Its core net profit plunged by a steeper 85% given the higher operating cost (i.e. labour and electricity) coupled with sub-optimal utilisation rate and loss of economies of scale.

QoQ, its 4QFY23 core net profit dipped into losses hit by lower sales order and higher input cost.

Outlook. The current average plant utilisation rate for KPS stands at approximately 50%, significantly below its optimal threshold of 70%. We understand that KPS’s operating condition will remain challenging due to the loss of its key customer T and the slowdown in the global economy, particularly China. Not helping either is the margin erosion due to the elevated labour and energy costs. KPS believes it will be more realistic to expect a recovery in 2HFY24 mainly underpinned by low inventory levels and new product launches of its customers (which is consistent with our assumption). However, we believe the recovery path ahead may be bumpy, and necessitate an increased focus on cost management. Meanwhile, the recent acquisition of precision metal component manufacturer MDS Advance Sdn Bhd (MDS) will add highmargin product offerings to its portfolio.

Forecasts. We maintain our FY24F earnings while introducing FY25F number.

Valuations. Consequently, we keep our TP of RM0.45 based on an unchanged 10x FY24F EPS of 4.0 sen, which is 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).

Investment case. 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 Customer D, 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) 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 - 27 Feb 2024