KCE Electronics

KCE Electronics Plc (KCE)

Plant visit shows large progress. KCE arranged a visit to KCE-Tech in Hitech IE in
Ayutthaya yesterday to show off its progress in improving efficiency as follows:
1) New panel development to reduce waste: PCB edge waste has been
reduced by two methods. First, it installed machines that can cut the border
to 1” from the previous 1.5”. On a standard 21”x24” panel, by our calculations
it can slash edge waste by 4% in terms of percentage of the whole panel.
Secondly, it is now outputting bigger panels that can be used with 40% of KCETech’s
orders: 20% has been switched over and 20% will be switched in 2H12.
2) New handling processes to reduce defects: The plant manager said that
most defects occur from handling when the workers touch the panels. It is
thus automating the handling process to a greater extent, with completion of
the changeover by yearend. It hopes to shrink the defect rate at KCE-Tech to
5% by yearend from ~7.4% now (and vs. 8-9% in 2011). This is not yet fully in
our projections, but by our calculations, if KCE-Tech can cut defect rate by 240
basis points, it would add Bt70mn profit per annum.
3) Utility expenses down on facility improvement: The floods gave KCE-Tech
the chance to cut utility expenses by way of new equipment and layout.
Q2 2012F: Bt3mn core profit, then Bt90mn/quarter from Q2 3012F. We are amending
our previous preview for Q2 2012F to accommodate the more rapid recovery at KCE-Tech.
Rather than the Bt20mn core loss expected earlier, we expect core profit of Bt3mn, up
sharply from the Bt107mn loss in Q1 2012, thanks to KCE-Tech’s improvement – which,
said management, nearly reached breakeven in June (at ~60% utilization). Inclusion of
Bt68mn net extra gains (from Bt142mn insurance claim but Bt74mn F/X loss) lifts
Q2 2012F net profit to Bt71mn. Since quarterly profit from the other plants is normally
Bt90-100mn, profit will be at least this when KCE-Tech breaks even, expected in Q3 2012.
Look for new earnings record in 2013F. KCE will start producing PCB for high-end
set-top boxes for its new customer in September. This is a large order and should
contribute sizable volume in next year. We expect KCE’s earnings to recover strongly to
Bt481 mn or Bt1.02/share in 2013F, a new record. This looks achievable when taken
against pre-flood core earnings of Bt117mn in Q3 2011 (annualised to Bt468 mn) and even
looks conservative when compared with its Bt181mn earnings in Q1 2010 (annualized to
Bt724mn) when KCE-Tech did not have its big defect problem.
Maintain Buy and Bt8.5 TP. Given the strong recovery back up to profitability and
production efficiency, we maintain Buy and a mid-2013 TP of Bt8.5 based on 9x PE,
which is the sector’s -0.5SD ten-year average. In addition, we expect KCE to announce
an interim DPS of Bt0.1 (or 1.3% yield) together with the Q2 2012 results on Aug 8.