KCE Electronics

KCE Electronics Plc (KCE)

Investment thesis
Our meeting with executives yesterday boosted our bullishness over the FY13-14 outlook—profitability is on a clear uptrend. We expect 1Q13 earnings to rise QoQ, despite low seasonality. QoQ profit growth will be sustained through 2Q13 and 3Q13. We have raised our FY13 target price to Bt19 fromBt16.5 to reflect our earnings upgrade. KCE remains our preferred pick in the Electronics sector for its buoyant operational outlook.
No material impact from a strong baht
Management guides that baht appreciation will impact only marginally on the firm's 1Q13 profitability. Although sales are quoted in foreign currency (76% in US dollars and 24% in euros), the firm’s 51% natural hedge (raw material costs are also quoted in foreign currencies) mitigates the effect of margin squeeze. Moreover, KCE has debt in dollars, so a stronger baht boosts the natural hedge by 1-2% (from 51% to 52-53%). In all, the firm has FX exposure of 23%. We estimate that a 1% stronger baht would squeeze GM by 27 bps. But KCE currently has forward contracts for about US$70m at the rate of Bt30/US$, which will make for an FX gain of around Bt100m in 1Q13.
Q1 2013 revisited—profit estimate upgraded; no seasonal impact
We are more optimistic about KCE’s 1Q13 earnings (due to be announced on May 9), so have revised up our estimate to Bt255m from Bt152m previously. That number represents a jump of 20% and 41% YoY. Stripping out extra items, core profit would be Bt155m, up 47% QoQ and a turn-around from a loss of Bt105m in 1Q12. The drivers were: 1) GM expansion on a full quarter profit at KCET, 2) greater sales volume and 3) a profit contribution by Chemtronics, (which KCE bought in 4Q12).
More conviction on Q2 2013 outlook; profit peak for year in Q3 2013
Management is now more bullish about the 2Q13 outlook, citing that it has secured orders equal to more than 90% of its PCB sales target for the quarter of US$70m. The firm also guides that lower raw material prices will boost margin—the price of copper has dropped 15% since YE12. Copper comprises about 14% of COGS, so we estimate a 2Q13 GM surge to around 22.5% (from 19.3% in 2Q12 and 21.5% in 1Q13). Earnings will peak in 3Q13, due to seasonality and new orders (PCBs for solar cells). GM should post QoQ growth on a full capacity run at KCET.
FY13-14 earnings forecast upgrades
We have revised up our FY13 and FY14 core earnings projections by 11.1% and 10.9%, respectively, as we now assume higher top-lines and fatter GMs (up by 70 bps for FY13 to 22.4% and by 100 bps for FY14 to 23.0%). We have also upped our FY13 target price to Bt19.0, pegged to a PER of 13x, which translates into PEG of 1x (an FY14-16 core earnings CAGR of 13%). Furthermore, there is scope for upside from our current projection from capacity expansion at a new plant in Ladkrabang (equal to 30% of total existing capacity; COD in 3Q14).