KCE Electronics

KCE Electronics Plc (KCE)

Investment thesis
Our meeting with executives yesterday boosted our bullishness over the FY13 profitability profile. We have revised up our core earnings forecast for the year by 8% to Bt873m. CAPEX for capacity expansion is likely to dent FY14 core profit growth, but we expect that the money spent will enable substantially better FY15 numbers. In order to factor in assumptions for heavier CAPEX and new capacity, we have cut our FY14 core earnings forecast by 7% but increased our FY15 projection by 11%. Our YE13 target price remains Bt19, pegged to an FY13 PER of 14x. KCE is our preferred pick in Electronics space for its superior operational outlook.
2Q13 revisited—profit estimate upgraded
We are now more optimistic about 2Q13 core earnings (due to be announced on August 8). The top-line should be Bt2.1bn, up by 10% QoQ and 45% YoY, driven by automotive customers. We have also upped our GM assumption (due to economies-of-scale and a weaker baht) to 24% from 22.5%. The SG&A/sales ratio should be unchanged QoQ at 13.5%. As such, we expect a core profit of Bt235m (32% above our previous forecast). We anticipate an FX loss of about Bt50m, which would leave a net profit of Bt185m (revised up 4% from our earlier projection).
Bullish on outlook for 3Q13 and beyond
Management is upbeat about the prospects for 2HQ13, citing secured orders equal to more than 93% of its 3Q13 PCB sales target of US$75m (4Q13 sales will soften QoQ on seasonality). We forecast that 2H13 core earnings will rise 6% HoH. The first phase of the Lardkrabang factory will start up in in Sept or Oct, boosting KCE’s nameplate capacity by 35% (the plant will open in three phases and add 1.4m sq.f/month, or 70% to capacity; see Figure 3).
Heavier CAPEX in 2H14; substantial cost savings in FY15 …
KCE now guides that CAPEX for the new factory might be somewhere toward Bt4.7bn, rather than its initial guidance of Bt2.8bn, as construction costs will be higher than earlier budgeted and the firm might also invest in a 7MW cogeneration power plant (management has yet to make a final decision). A power plant would significantly reduce electricity costs over the long-term and there will probably never be a cheaper time to borrow. We roughly estimate IRR for the project at about 22%.
…so we cut  our number for FY14, but raised it for FY15
The new plant at Ladkrabang will contribute losses at first (depreciation and interest expenses). As such, we have cut our FY14 core earnings forecast by 7% to Bt824m. However, a rising run rate and efficiency enhancements should enable a black bottom-line for the new facility in FY15. As such, we have revised up our FY15 core earnings projection by 11% to Bt1.1bn.