Valuation / Recommendation

We recommend subscribing to Kucingko Berhad (Kucingko) with an RM0.54 FV based on 20x FY25F EPS, translating to a 79% potential upside to the IPO price. Our target PE is at a 20% discount to comparable global peers’ average, given Kucingko’s smaller market capitalisation. We like the stock for its growth prospect in the animation industry, strong balance sheet with a net cash position, and decent net yield.

Investment Highlights

Rising profile. Primarily serving international clients, KuckingKo provides 2D animation production services through its subsidiary, Inspidea. Between FY20 and FY23, its revenue nearly doubled, while earnings showed strong growth, with a 3-year CAGR of 31%. This was largely thanks to 1) Clinching higher-value projects, and 2) Better staff productivity. In FY23, Kucingko's average revenue per minute of animation produced reached a peak of approximately USD4,849, which was a 20%- 32% increase from previous years. This rise was attributed to securing higher-value projects from new and existing clients, including Customer H and long-time partners Customer B and Customer J. The company's ability to handle complex, high-profile projects such as the recent Lego Monkie Kid Season 5 (for Customer H) is a testament to the improving technical capabilities of Kucingko’s staff, boosting its credentials.

Better staff productivity. Based on revenue per average animator employed, Kucingko's staff productivity has significantly improved over the years. At its peak, its staff produced an average of 7.8 minutes of animation in FY22, compared to just 5.9 minutes in FY20. Kucingko went on a hiring spree in FY22-23, adding 113 new staff - this partly explains the moderation in average revenue and minutes per animator in FY23.

Further workforce expansion. Kucingko plans to hire about 100 skilled technical staff over three years as part of its IPO plans, spreading them across its existing office in Petaling Jaya and two new branch offices in Sabah and Sarawak. This expansion should enable Kucingko to handle up to 7 animation projects concurrently, compared to 3-5 projects before. We expect the hiring to be frontloaded, with 40 new hires expected in FY24 and 60 in FY25. With the addition of new staff, we expect the revenue per average animator employed to decrease slightly to USD26,500 in FY24F before increasing again to USD28,000-29,000 in FY25F-26F. All in all, this should result in strong earnings growth of 15-32% from FY24F-FY26F.

Risk factors for Kucingko include (1) Dependency on certain major customers, (2) Dependency on skilled staffs, and (3) Forex risks.

Source: Mercury Securities Research - 10 Jul 2024