Kumpulan Perangsang Selangor (KPS) chalked a higher core net profit during the quarter, climbing +114% QoQ to RM5.0m. Despite the improvement, 9MFY23 core net profit dropped 72.2% YoY, attributed to underperformance of its manufacturing and licensing divisions. Cumulative 9MFY23 core net profit is below ours and consensus estimates at 44.6% and 55.3% respectively. Hence, we reduce our forecast for FY23 by 54% to further align with the lowered electronics demand coupled with challenging operating cost environment for the remainder of FY23. We maintain our forecasts for FY24-25F as we opine that recovery within its core division would return by 1HFY24, in line with KPS’ expectation. Additionally, we posit earnings could be buoyed by activities from other segments within the Group i.e.: trading (Aqua-Flo SB) and infrastructure (SmartPipe Technology SB) divisions. Nevertheless, we maintain our Neutral rating on KPS with an unchanged TP of RM0.78 pegged at 0.35x PBV as we have rolled over our valuation base to CY24 previously.

• 9MFY23 revenue declined 12.3% YoY. Overall topline performance is dragged by weakness across all divisions – manufacturing division recorded 13% decline owing to lower production volumes on slower demand. Its licensing & infrastructure divisions recorded a sharp decline of 27.5% and 88.5% YoY in revenue as a result of slower billing of royalty payment amounting to RM10m to existing clients and completion of job in its infrastructure division.

• 9MFY23 pretax profit (PBT) down 44% YoY. The Group reported a lower pretax profit of RM34.9m in 9MFY23, dragged by higher finance cost and operating cost (labour, electricity, paper, etc). The Group also incurred higher foreign exchange losses to RM10.1m (+>50% YoY) in 9MFY23 from its subsidiary.

• Outlook. As of 9MFY23, earnings weakness of the Group was dragged by its core division. The manufacturing division’s headline PBT dropped 30.1% YoY as a result of margin erosion in regards to higher operating cost. Despite its recent sizeable contract clinched by its subsidiary, Aqua-Flo SB from Air Selangor, we are mindful of the Group’s earnings outlook as weakness in electronics demand could persist into 1HFY24 as global economic outlook continues to deteriorate. However, we do not discount the possibility that earnings could be buoyed by activities from other segments within the Group i.e.: trading (Aqua-Flo SB) and infrastructure (SmartPipe Technology SB) divisions.

Source: PublicInvest Research - 28 Nov 2023