KCE Electronics

KCE Electronics Plc (KCE)
Beat all estimates
KCE posted a record high core profit for 3Q13 of Bt319m, up by 833% YoY and 35% QoQ. The result beat our estimate and the consensus by 3%, due to a fatter gross margin than assumed. An FX gain of Bt10m was booked for the quarter. As such, net profit came to Bt330m, up by 35% YoY and 627% QoQ.
Results highlights
Revenue rose by 12% QoQ and 45% YoY to Bt2.5bn. The YoY jump was driven by a bigger contribution from KCE Technology (Ayutthaya); the QoQ rise was due to seasonality. GM shot up by 10.5% YoY and 3.6% QoQ to 28.5%, higher than our assumption of 27.1%. The record GM was driven by rising economies-of-scale, as the group utilization rate was 95% during the quarter. The SG&A/sales ratio was 14.2%, down from 15% in 2Q13, but up from 14% in 3Q12. KCE also posted an FX gain of Bt10m. As such, the bottom-line was Bt330m.
Outlook
In QoQ terms, core earnings will soften in 4Q13, as the fourth-quarter is low season for sales and GM tends to decline during the period. But on a YoY basis, we anticipate a leap in core profit of 113% on sales and GM expansion. Although KCE currently runs at nearly full capacity, management guides that a de-bottlenecking project will add about 5% to group nameplate capacity. Furthermore, new plant is scheduled to start operating in September 2014. We expect sales growth of 12% and core profit expansion of 14% in FY14.
What’s changed?
Our FY13 and FY14 projections stand unchanged. 9M13 core earnings represent 76% of our full-year model, but 85% of the consensus number for FY13. As such, we anticipate a street FY13 profit forecast upgrade.
Recommendation
KCE remains our preferred pick in the Electronics sector for its long-term sales growth outlook and expansive GM profile. New capacity will initially put some pressure on 4Q14 gross margin, but that will be only a temporary blip—GM should normalize when the new plant breaks even (we assume 2Q15). With an FY14-16 core earnings CAGR of 13%, we think the current core PER of 10.3x for FY14 still presents a good entry point. Our BUY rating stands with a YE14 target price of Bt21.40.