KCE Electronics

KCE Electronics Plc (KCE)

Investment thesis
Yesterday, we attended KCE’s analyst meeting. In all, the tone of the meeting was positive. 4Q12 core earnings should more than double QoQ and the prospects for FY13 now look better than we previously modeled. We have upgraded our FY13-14 earnings forecasts and arrived at a new YE13 target price of Bt11.90, pegged to KCE’s long-term EV/EBITDA of 7x. The stock currently trades at an FY13 core PER of 9.9, equal to PEG of 0.4x (based on an FY13-16 earnings CAGR of 22%), below the sector average of 0.7x. Despite its recent share price outperformance, we believe KCE has further to run, given ongoing forecast upgrade flows. BUY!

KCE optimistic about its order outlook
4Q12 sales should sustain an uptrend on order flows from new customers. Moreover, KCE gained market share from a competitor—Viasystems Group, a leading provider of multilayer PCBs, whose plant in China was damaged by a fire on Sept 5. Management targets sales growth for 4Q12 of 9% QoQ and for FY13 of 25% YoY, driven by increasing orders from both new customers (PCBs for set-top-boxes and stereos) and old customers (PCBs for automotive applications). 

GM expansion on Chemtronics consolidation—earnings upgrade
KCE guides that its laminate sheet cost has declined 8%, due to a 30% dive in the cost of fiberglass. The company will trim its sales prices by only 1.5% in FY13. As such, we can expect a 30 bps boost to GM from lower raw material costs. Furthermore, the consolidation of Chemtronics should facilitate further GM expansion. We conservatively estimate GM of 19.5% in FY13, up 50bps YoY. As such, we have upgraded our 4Q12 and FY13 earnings forecasts by 45% and 17%, respectively.

Capacity expansion ahead
The firm plans to double its multilayer PCB capacity—its current 1.2m square feet/month capacity (at KCE Tech) is expected to be fully utilized by YE13. KCE has secured a land plot at Ladkrabang and is currently in the process of designing a factory. Construction should start in late 2Q13 or 3Q13, after flooding-related insurance claims are paid. The first phase will boost production capacity by 0.7m sq.f/month, equal to 30% of total current capacity (2.3m sq.f/month). The total CAPEX budget is set at Bt2.8bn; we expect that Bt1.4bn would be required for the first phase.

Scope for upside on two fronts
COD for the new capacity is expected in mid 2014, which would mean scope for upside to our current FY14 earnings forecast. In the meantime, there is potential for upside to our FY13 EPS forecast. Management will ask the board to consider cutting the company's paid-up capital, as KCE doesn’t plan to re-sell the 14m shares that it bought-back during June 11-Dec 10 2012. A smaller number of shares would boost EPS from our current estimate by Bt0.04.