• MYR0.48 FV based on 20x FY25F P/E. Kucingko is well-positioned to capitalise on the robust demand for 2D animation services, backed by an assetlight business model and strong customer relationship. The setting up of a US representative office and appointment of an animation industry veteran is expected to solidify its exposure to the streaming video on demand (SVOD) market, in our view. Valuation is undemanding, at 14x FY25F EPS vs the average 29x of comparable peers, supported by attractive ROEs and dividend payout.

• Earning its stripes in the US and Europe. Kucingko operates a unique assetlight business model with its strong pool of local animation specialists serving as the group’s key assets. The bulk of revenues are sourced from the North American and European markets where it has carved a niche with customers. We believe the group is well poised to capitalise on the expanding SVOD market in the US, which is projected to grow at a 19.8% CAGR between 2024 and 2030. Stronger demand for digital content distribution should further boost the demand for the group’s 2D animation services.

• Strong linguistic proficiency. We see the strong English proficiency as a key competitive advantage for Kucingko. Its larger peers in Korea and Thailand are not able to match the linguistic capabilities with the language not being widely used in the home markets. Armed with a multi-ethnic workforce (all animation artists are based in Malaysia), the company delivers enhanced script comprehension for customers which leads to a better understanding of the content needs, taking into account market dynamics and industry nuances.

• Strategic expansion to drive 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 US will enable the group to better serve its existing clients and reach out to a new pool of customers. Plans are also in store to set up two offices in East Malaysia to tap into an animation talent pool that would could drive further staff cost efficiency. Management has plans to grow the workforce to over 500 over the next three years from under 300 currently.

• Valuation is undemanding; reflective of its unique business model. The target P/E is at -1SD to Bursa Malaysia Telecommunication & Media Index’s (KLTEL) 5- year mean of 21.8x and at a 30% discount to the 2-year forward P/E of its peers. We think the valuation is reasonable given its much smaller market capitalisation and investor apprehension over its prospects, being the first animation production house to be listed on Bursa Malaysia. The target P/E is ahead of the FBM Small Cap Index’s 5-year mean of 12x, reflecting its unique asset-light business. Key risks include the ability to secure new projects to sustain its orderbook, customer concentration risks and USD weakness.

Source: RHB Securities Research - 30 Oct 2024