KPS’s 1QFY24 results disappointed. Its 1QFY24 core net loss widened significantly YoY on sluggish orders amidst soft global demand for consumer electronics products. Not helping either was its inability to find replacement after losing customer T recently. We cut our FY24-25F earnings forecast by 50% and 5%, respectively, but keep our TP of RM0.45. Maintain UNDERPERFORM.

Its 1QFY24 results disappointed with a core net loss of RM10m, against our full-year net profit forecast of RM21m and the full-year consensus net profit estimate of RM20m. The key variance against our forecast came largely from sluggish orders amidst soft global demand for consumer electronics products.

YoY, its 1QFY24 revenue fell 5% weighed down by: (i) on sluggish orders amidst soft global demand for consumer electronics products and the inability of its Indonesia operation to find replacement after losing customer T recently, and (ii) lower licensing income (-26%) following the disposal of a 50% equity stake in Kaiserkorp. It core net loss widened to RM10.4m (from a net loss of only RM1.3m a year ago), also weighed down by higher labour and electricity costs and the loss of operating scale.

QoQ, similarly, its 1QFY24 core net loss widened on lower sales but higher input cost.

Outlook. KPS’s average plant utilisation stands at only about 45% currently, significantly below its optimum level of 70%. We believe the situation is unlikely to improve significantly over the immediate term given the sluggish demand for consumer electronics products globally. There is no sign that KPS is close to securing a replacement after the loss of Customer T. Not helping either is elevated labour and energy costs.

We believe there is a more realistic chance that KPS will see a pick-up in orders towards the later part of the year, underpinned by restocking and new product launches by its customers. Meanwhile, its newly- acquired precision metal component manufacturer MDS Advance Sdn Bhd (MDS) will add high-margin product offerings to its product portfolio.

Forecasts. We cut our FY24-25F earnings foreacsts by 50% and 5%, respectively, to reflect softer demand and higher cost.

Valuations. However, we maintain our TP of RM0.45 as we roll forward our valuation base to FY25F on an unchanged 10x 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).

Investment case. We like KPS for: (i) the long-term growth prospects of the consumer electronics players, which are KPS’s main customers, (ii) its diverse portfolio of manufacturing 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 - 4 Jun 2024