• MYR0.44 FV based on 18x FY25F P/E. Kucingko plans to raise MYR30m from its IPO – primarily for capacity expansion, locally and abroad, as well as for working capital and listing expenses. We forecast a 3-year earnings CAGR of 18.3%, underpinned by the group’s strategic expansion plans, establishment of a sales office in the US and flourishing demand in the animation services industry that should catalyse new project wins.

• High demand for animation. Kucingko is well poised to ride on the burgeoning streaming video on demand content across platforms such as YouTube, Netflix, Amazon Prime Video, Disney+ and HBO Max. According to Grand View Research, the US video streaming market is projected to grow at a CAGR of 19.8% from 2024 to 2030. This expansion in digital content distribution is anticipated to further boost the demand for Kucingko's 2D animation services.

• Strong linguistic proficiency a key competitive advantage. The group has a strong track record with clients, demonstrated by its long-term relationship with three of its top five customers, each spanning 9-16 years. Beyond producing quality work, Kucingko's proficiency in English, as a Malaysian company in a multicultural nation, mitigates communication issues. This gives Kucingko an edge over its peers in Korea and Thailand where the use of the English language is less prevalent. With most of its clients hailing from Europe and North America, the advantage ensures smoother interaction, better script comprehension and higher customer satisfaction.

• Strategic expansion driving growth. As most of the clients are from the North American region (c.74% of FY23 revenue), the establishment of a sales office in the USA will enable the group to better serve its existing clients and reach out to a new pool of customers. Hiring experienced resident US staff will provide the group with access to the latest trends and insights into animation markets, allowing it to penetrate deeper into the US market and secure new business opportunities. The group will also allocate 40% of its IPO proceeds to set up two offices, one each in Sabah and Sarawak. This will enable Kucingko to expand its business capacity, with an estimated 75 new employees, benefitting from cheaper labour cost in these regions. Furthermore, business capacity will be bolstered by the planned hiring of 30 animation artists in the Selangor office.

• We project a core earnings 3-year CAGR of 18.3%. We see the group’s recurring net profit margin hovering at 29-30% over the forecast period. Our MYR0.44 FV is based on target P/E of 18x on FY25F EPS, at a 24% discount to selected global peers. We think this is warranted given its much smaller indicative market capitalisation albeit being ahead of the FBM Small Cap Index’s 5-year mean of 12.2x, to reflect its attractive earnings growth, superior ROE, profitability and balance sheet strength. Key risks: Slower-than-expected job replenishment and contract termination from key clients.

Source: RHB Securities Research - 5 Jul 2024