Background

KHPT Holdings Berhad (KHPT) is primarily engaged in the manufacturing and sale of automotive parts and components, including body parts, seat structures, and other components such as engines and absorber parts. The group operates with 45 press machines and 4 types of production lines, with the specific production line utilised depending on the type of parts and components being produced.

IPO Statistic

The IPO entails a public issue of 108,644,300 new ordinary shares and an offer for sale of 38,226,600 shares at an IPO price of RM0.20/share.

Public Issue:

• 20,119,400 new shares for application by the Malaysian public.

• 10,059,700 new shares for application by Eligible Persons

• 78,465,200 new shares by way of a private placement to selected

Investors.

Main Competitive Advantages

1. Products are Used in The Assembly of Malaysia's Top-Selling Automotive Brands
2. Expertise in Die Solutions and Process Engineering
3. Long-Standing Relationships with Customers
4. Experienced Management Team

Valuation

Based on an IPO price of RM0.20 per share, KHPT is valued at a PER of 12.8x FY23 core EPS. We assign a fair value of RM0.20/share to KHPT using a PER of 11x for its CY25 EPS, aligning it with the weighted average PER of comparable companies in the automotive sector. Not Rated.

Business Overview

KHPT Holdings Berhad (KHPT) is primarily engaged in the manufacturing and sale of automotive parts and components, including body parts, seat structures, and other components such as engines and absorber parts. These automotive parts and components are utilised in the assembly of new vehicles for the production market or as spare parts for the repair, maintenance and service of used vehicles in the replacement market. Most of its parts and components are primarily supplied to local automotive manufacturers, specifically Proton and Perodua, for assembly into complete vehicles.

The group operates with 45 press machines and 4 types of production lines, with the specific production line utilised depending on the type of parts and components being produced. In FY23, the utilisation rates for the blanking line, body parts production line, seat structural parts production line, and absorber parts production line were 70.71%, 84.19%, 94.85%, and 30.18%, respectively. while the overall utilisation rate of its press machines stood at 67.33%.

KHPT’s role as a Tier 1 Supplier/Manufacturer or a Tier 2 Supplier/Manufacturer would depend on its customer arrangements and orders for automotive parts and components, which vary across different vehicle models.

Utilisation of Proceeds

The estimated gross IPO proceeds of RM21.73mn are expected to be utilised for the followings:

Key Competitive Advantages

1) KHPT’s Parts and Components are Used in The Assembly of Malaysia's Top-Selling Automotive Brands

KHPT’s production of parts and components are primarily used by local automotive manufacturers, Proton and Perodua, for assembling of their respective vehicles. These components are customised and produced according to the specific requirements of each vehicle model and are supplied either directly to Proton and Perodua or to their Tier 1 suppliers. As these manufacturers strive to expand their market share with the introduction of new or upgraded models, KHPT would benefit by leveraging on the rise in future sales of Proton and Perodua for continued business growth.

2) KHPT’s Expertise in Die Solutions and Process Engineering Enables Them to Consistently Produce High-Quality Automotive Parts That Meet Customer Requirements While Helping Reduce Manufacturing Costs.

By leveraging on the expertise of key technical personnel, the Group has developed optimised manufacturing processes that significantly reduce overall production time and costs, allowing it to offer competitively priced, high-quality products. This value-added service enhances customers' manufacturing and assembly processes, facilitating cost reductions. The in-house die solution expertise ensures quality control and quick adaptability to design changes, reinforcing the Group's competitive edge. Ultimately, the capabilities in die solutions and process engineering enable the Group to consistently meet customer demands for quality, cost-effectiveness, and timely delivery, fostering long-term relationships and securing future orders for various vehicle models.

3) Long-Standing Relationships with Customers

The group’s customers are primarily Tier 1 Suppliers/Manufacturers of local automotive manufacturers. For over 11 years, most of its major customers have purchased parts and components for further processing and assembly. These sub-assemblies are then supplied to local manufacturers, including Proton and Perodua, to produce complete vehicles.

4) Strong History in Automotive Parts Manufacturing, Backed by An Experienced, Hands-On Senior Management Team.

The group has a 29-year track record in the automotive parts and components manufacturing industry, expanding its product range from absorber parts to seat structures, body parts, and engine components, thereby covering a broader spectrum of automotive needs. Additionally, the group is led by a technically skilled and experienced key management team, with 11 to 21 years of relevant industry experience.

Key Risks

1) Too dependent on major customers.

2) Any prolonged shortages and/or delays in the supply of raw materials may affect the group’s business operations.

3) Business and financial success hinges on the ongoing security of new, substantial contracts.

4) Ongoing extensions of the hiring freeze on foreign workers could impact on the group's financial performance and reputation.

KHPT's operations in FY21 were interrupted by several closures due to government lockdowns in Malaysia aimed at controlling COVID-19, as the group was not recognised as an essential service. Consequently, revenue rose by 97.1% to RM116.3mn in FY22, driven by the resumption of automotive activities following relaxed movement controls. However, in FY23, revenue saw a slight decline of 1.9% to RM114.1mn, primarily due to decreased demand for body parts.

In FY22, KHPT’s core net profit rose to RM9.2mn, driven by higher margins. However, in FY23, the core profit fell by 31.2% to RM6.3mn, primarily due to lower margins and increased administrative and other expenses.

Future Plans and Business Strategies

The Group’s Future Plans and Business Strategies Are as Follows:

1) New Automated Body Parts Production Line

KHPT intends to expand its manufacturing capacity by setting up a new body parts production line to meet the anticipated increase in demand from its customers, premised on the rolling forecast provided to the group as well as discussions with its customers. The utilisation rate currently stood at 92.52% for 1HFY24. The new automated body parts production line will enhance the group's manufacturing capacity for body parts by 400 pieces per hour, resulting in an annual capacity of 2.26mn pieces. This will increase the group's total annual manufacturing capacity for body parts by 83.33%, from 3.14mn pieces to 5.77mn pieces. Management intends to spend about RM15.5mn from the IPO proceeds to fund the set up.

2) Renovate TPG Factory

The group plans to renovate part of its TPG Factory, focusing on flooring reinforcement and foundation work, to facilitate the installation of new machinery and equipment. This will also ensure a safe workplace and reduce risk exposure for workers. The renovation is expected to cost RM0.45 million, to be funded through IPO proceeds.

(a)Purchase one Overhead crane

The group plans to acquire an overhead crane with a lifting capacity of approximately 15 tonnes to enhance lifting capabilities and facilitate the transfer of heavy dies between the storage area and press machines. The crane is estimated to cost RM0.37mn, to be funded through IPO proceeds.

Outlook

As stated in an independent market research report by Smith Zander International, included in the IPO prospectus, KHPT held a market share of approximately 0.41% in Malaysia's metal parts and accessories for motor vehicles in 2023, based on its revenue. The ongoing growth of local automotive manufacturers, particularly Perodua and Proton, is anticipated to benefit suppliers of parts and components for the production of Proton and Perodua vehicles, including KHPT.

Ongoing design and development for new and existing vehicle models will drive the creation of new automotive parts and components, promoting localisation. This sustained demand for new parts is anticipated to fuel growth among automotive parts and components industry players.

We anticipate that the Malaysian automotive industry will experience a decline in total industry volume (TIV) in 2024 (-6.2% YoY) as backlog orders begin to normalise. This normalisation process may result from several factors, including a stabilisation of supply chain disruptions and adjustments in consumer demand following the exceptionally high demand seen in previous years. As manufacturers work through existing orders, the rate of new orders may slow down, leading to a reduction in overall vehicle sales.

Balance Sheet

On a pro forma basis, the balance sheet is expected to improve from a net gearing of 0.21x to 0.10x, post listing and utilisation of IPO proceeds.

Dividend Policy

The group's dividend policy is to distribute up to 10% of the group’s net profit at the discretion of the Board. However, we anticipate that the group will pay out 20% of its earnings as dividends, supported by improved cash flow and historical payout ratios.

Earnings Forecast

We anticipate the group will achieve net profit growth of 5.1% and 12.9%, reaching RM6.6mn for FY24 and RM7.5mn for FY25, respectively. The increase in earnings is expected to stem from higher sales volumes of automotive parts and components, along with improved margins. We project that auto parts sales volume will rise by 1% in FY24 and 4% in FY25. Additionally, the gross margin is expected to improve to 13.2% in FY24 and 14.0% in FY25 from 12.4% in FY23.

Valuation

Based on an IPO price of RM0.20 per share, KHPT is valued at a PER of 12.8x FY23 core EPS. We assign a value of RM0.20/share to KHPT using a PER of 11x for its CY25 EPS, aligning it with the weighted average PER of comparable companies in the automotive sector. Not Rated.

Source: TA Research - 24 Sept 2024