KPS’s 1HFY24 results met expectations, consistent with our projection for a subdued FY24 due to ongoing weak demand for consumer electronics and a potentially uneven recovery. While 2QFY24 saw KPS returning to the black, we expect a more meaningful recovery in FY25 driven by restocking and new product launches from its customers. Meanwhile, it is actively enhancing its cost control measures. We maintain our forecasts, TP of RM0.45 and UNDERPERFORM call.

Stronger 2H ahead. 1HFY24 core net loss of RM6m came in within our expectation, aligning with our full-year forecast of RM11m and the full- year consensus estimate of RM15m. However, we deem the results within expectations as we expect a stronger 2H mainly driven by the recovery in consumer E&E products.

YoY, its 1HFY24 revenue declined 6% on the back of lower contribution from: (i) manufacturing segment (-7%) due to a decline in orders across its medical and semiconductor product portfolio amidst elevated inventory level, and (ii) licensing segment (-64%) following the disposal of a 50% equity stake in Kaiserkorp. As a result, the group operated below its optimal level, causing its bottomline sink into the red.

QoQ, the group showed signs of improvement in 2QFY24, returning to profitability mainly driven by the recovery in demand within the consumer electronics segment as well as increased sales of water meters and chemicals in its trading segment.

Outlook. KPS’s average plant utilisation stood at only about 50% currently, well 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.Meanwhile, it is actively enhancing its cost control measures .

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. Maintained.

Valuations. We maintain our TP of RM0.45 based on an unchanged 10x FY25F PER, 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 amidst high inflation and economic uncertainties. Maintain UNDERPERFORM.

Risks to our call include: (i) a stronger-than-expected recovery in the consumer electronics sector, (ii) easing of input costs, and (iii) consistent renewal of contracts by key clients.

Source: Kenanga Research - 28 Aug 2024