KCE Electronics

KCE Electronics Plc (KCE)

Look for new high core profit of Bt210-230mn in 2Q13F. While the second quarter is normally a weak season for the electronics industry, we expect KCE to post a new high for core earnings of Bt210-230mn in 2Q13F due to several factors. Firstly, order flows were very strong, growing QoQ after clients gained greater confidence in KCE-Tech’s performance. The improvement in KCE-Tech’s production efficiency, notably the reduction of scrap rate to <5% from the pre-flood level of 8-9%, looks sustainable. We highlight the fact that the reduction in scrap in and of itself already adds considerably to profit – as much as one-third of 2010’s profit (pre-flood). Furthermore, the baht/US$ rate has been moving more favorably for exporters, weakening 3.9% mtd. The combination of these factors is poised to expand KCE’s gross margin to above 23% (>80 basis points QoQ, >370 basis points YoY) in 2Q13F.
.. and even better in 3Q13F. According to KCE management, mass production of some new items will start in 3Q13. Sales are expected to grow steadily to a new peak in 3Q13F before seasonally dropping in 4Q13. Excluding the FX impact, higher utilization will widen gross margin and KCE’s earnings are likely to again break a record in 3Q13F. To round out the good news, the final payment on its flood damage insurance claim is expected to be paid in 3Q13. This could be above Bt1bn, far more than our current assumption of Bt400mn.
Upside risk to 2013F. Our 1H13F core profit projection of Bt363-383mn is equal to 53-55% of our full-year forecast of Bt691mn. 3Q13F is likely to be its peak from both new business and seasonality. Therefore, we see upside risk to our 2013F - which is already a new record for KCE. According to management, the company has been very busy working with new clients and has added business from existing clients - which should lead to continued growth after this year.
Maintain Buy with Bt19 TP. KCE’s performance is expected to stand out from its peers in 2Q13F, underwritten largely by its internal improvement in production efficiency in which it transformed a loss-making plant (KCE-Tech) into an earnings driver. Beside its turnaround story, we expect it to pay a generous dividend yield of an estimated 4.35% on 2013F. We are still Buyers and maintain our TP of Bt19 based on 13x PE, which is the sector’s +0.5 SD ten-year average.