KPS's 9MFY24 results were within our expectation with stronger quarters ahead driven by a recovery in consumer E&E. It guided for a positive outlook driven by improved orders from existing customers and an expanded customer base. However, we believe the recovery will be uneven with a more meaningful rebound expected in FY25. Meanwhile, it is actively pursuing acquisitions to complement its growth strategy. We maintain our forecasts, TP of RM0.45 and UNDERPERFORM call.

Stronger 4Q. Its 9MFY24 core net profit of RM5.4m came in within our expectation but disappointed the market, coming in at 51% and 34% of our full-year forecast and full-year consensus estimate, respectively.

However, we deem the results within expectations as we expect a stronger 4Q mainly driven by the recovery in consumer E&E products and improved margins as plant utilization nears optimum levels.

YoY, its 9MFY24 revenue saw a 10% declined mainly dragged by its manufacturing segment (-11%), the largest revenue contributor. This was in line with earlier warnings of weaker customer loading volume due to strategic inventory adjustments in a sluggish consumer market. The licensing segment also saw a sharp 76% drop in revenue following the divestment of a 50% equity stake in Kaiserkorp. Consequently, the group operated below its optimal level, resulting its core net profit to fall steeper by 25% due to loss of economies of scale.

QoQ, KPS showed signs of improvement as 3QFY24 core net profit surged more than doubled with GP margin recovery to 20% (+3 ppts) on improved loading volume as utilisation rate trended higher to ~57% compared with ~50% in 2QFY24, mainly driven by consumer E&E.

Outlook. KPS's average plant utilisation stood at only about 57% 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 - 29 Nov 2024