• We remain optimistic on KPS’s long-term business prospects  following our recent meeting with Kumpulan Perangsang Selangor  (KPS) Investor Relations (IR) team driven by its large business  exposure within the manufacturing segment.

• Our optimism is also driven by the group’s recent acquisition of  MDS Advance Sdn Bhd (MDS) for cash consideration of RM85mn  which came with a cumulative profit after tax (PAT) guarantee of  RM17mn over 2023-2024 as this would strengthen KPS’s market  position within the manufacturing segment.

• We however cut our 2023F/2024F earnings by 2%/8% respectively  as we lower our revenue assumption in tandem with the nearterm challenges. Notwithstanding that, KPS’s long-term outlook  remains attractive given its resilience and large business exposure  within the manufacturing coupled with ongoing optimisation  initiatives – where all these are expected to contribute to healthy  earnings growth in the short to medium term.

• We reiterate our BUY call on KPS at a lower TP of RM0.83 from  RM0.85, pegged at 10x PER to 2023F EPS of 9.4 sen. We continue  to like KPS given its robust outlook within the manufacturing  business, competitive EBITDA margin, and attractive dividend  yield.

Long-term Business Outlook Remains Resilient

We recently met with Kumpulan Perangsang Selangor (KPS)’s Investor  Relations (IR) team, post 3Q22 financial performance. We remain  optimistic on KPS’s long-term business prospects following the meeting  driven by its resilient business prospect underpinned by diversified  customer and product portfolio within the manufacturing segment. Near-term risks remain however amid global inflationary pressure which could dampen demand, ongoing supply chain disruption and  geopolitical tension which may affects orders from customers within  the manufacturing business. Given uncertain and challenging 2023’s  outlook, KPS guided a single-digit revenue growth in the upcoming  years.

The Acquisition of MDS to Strengthen KPS’s Manufacturing Segment

We foresee the recent acquisition of 100% stake in MDS Advance Sdn  Bhd (MDS) – a high-precision computer numerical control (CNC) metal  machine maker for a total cash consideration of RM85mn is in line with  the company’s strategic move which aims to strengthen its market  position within the manufacturing segment and at the same time fulfil  the vertical integration within the segment. In addition, the acquisition  of MDS came with a cumulative profit after tax (PAT) guarantee of  RM17mn over 2023 and 2024 (RM8mn in 2023 and RM9mn in 2024) to  safeguard the business’s bottom line post-acquisition.

With 2023 and 2024 profit guarantee of RM8mn and RM9mn with average 3-year PAT margin  of 28%, we estimate MDS’s 2023F and 2024F’s revenue of RM27.8mn and RM31.2mn respectively. We believe the profit guarantee is achievable given healthy prospects for the  global machining market globally coupled with MDS strong customer portfolio including Jabil,  Plexus, Interplex, Sunright, TakWak, etc. According to Beroe Inc. Market Intelligence, the  global machining market is expected to grow at a CAGR of 7% to reach USD414.2bn by 2024.

An Attractive DPS of 6.5 sen Declared, Ex-Dividend Date: 9th Dec 2022

KPS declared an interim and special dividend of 2.0 sen and 4.5 sen respectively which brings  a total DPS to 6.5 sen. This translates to an attractive yield of 8.3% at current share price.  Note that, the ex-dividend date is on 9th December 2022 and the entitlement date is on 12th December 2022. The announcement of the special dividend was subsequent to the proceeds  of RM183.4mn following the disposal of 20% shares in SPRINT Holdings.

Earnings Revision

Following KPS’s guidance on slower growth for revenue amid challenging global situation which may impact consumer electronics, automotive, and the mattress segment, we cut  2023F/2024F earnings by 2%/8% in line with lower revenue assumption. Notwithstanding  that, KPS’s long-term outlook remains attractive given its resilient and large business  exposure within the manufacturing coupled with ongoing optimisation initiatives that would  provide healthy earnings growth to the company.

Reiterate BUY at lower TP of RM0.83

We reiterate our BUY call on KPS at a slightly lower TP of RM0.83 (from RM0.85), pegged at  10x PER to 2023 EPS of 9.4 sen. We believe this is justified given its robust outlook within the  manufacturing business, competitive EBITDA margin, and good dividend yield. We see the rebound in KPS’s share price recently since the announcement of special dividend as normal  and we expect the share price to normalise between RM0.69-RM0.73 level after the  entitlement. At our TP, total return including dividend yield is almost 17% and hence our BUY  recommendation.

Source: BIMB Securities Research - 8 Dec 2022