KCE Electronics

KCE Electronics Plc
3Q13F: new high core of Bt342mn. KCE is expected to post an outstanding 3Q13F
with three new highs: 1) Bt2.5bn revenue (+11% QoQ), 2) gross margin of 28% (+310
basis points QoQ), thanks to sales growth, baht weakness against US$ and reduction in
overall scrap rate to ~4.3% from 4.7% last quarter and 3) core earnings of Bt342mn
(+44% QoQ, Bt352mn net profit after FX gain). Note that a YoY comparison is not
meaningful since it was at that time in the early stages of flood recovery. 3Q13 overall
utilization rate was ~95%. We expect a seasonal fall in 4Q13F performance.
Upgrade 2013F by 13%. Its improvements in scrap control and gross margin are
looking better than we had anticipated and we are in response raising 2013F gross
margin by ~100 basis points to 25.3%, the same as 9M13F. This raises our 2013F core
earnings by 13% to an all-time high of Bt957mn (Bt1.63/share, fully diluted) and
Bt1.2bn net profit after FX gain and insurance claims. The remainder of its insurance
claim is estimated at Bt1bn; since this has been booked as a receivable, there will be no
large boost to the bottom line. What is more valuable is that this is expected to be
used to pay down debt which would slash interest expenses by ~Bt10mn/quarter.
Negotiations hint at >20% 2015F growth. KCE’s new plant will start operating in
September 2014. Management says it is in talks with a number of clients that are
expected to supply orders for the new plant that will lead to 2015F sales growth of
>20%. We are more conservative and estimate 15% sales growth in 2015F. This new
plant will be the company’s most advanced and efficient plant and thus is positioned
to supply a better margin than all existing plants.
Maintain Buy with new mid-2014 TP of Bt24 TP. Following the earnings upgrade,
we are raising mid-2014 TP to Bt24 from Bt22. This is based on based on 13x PE, which
is the sector’s +0.5 SD ten-year average.