KCE Electronics

KCE Electronics Plc (KCE)
2Q13F: Bt226mn core and Bt182mn net profit. With the steady ramp up of
utilization at KCE Tech to ~85% in 2Q13F and orders from new clients starting this year,
revenue is projected to grow 11% QoQ to Bt2.2bn (YoY not comparable because of the
flooding). Gross margin is expected to jump 180 basis points QoQ to 24%, a three-year
high, thanks to higher utilization, better efficiency and the baht depreciation against
the USD (~9% since mid-April). Scrap rate at KCE-Tech remains at a tolerable 4.5-4.7%,
close to half the pre-flood level of 8-9%, showing successful management of defects.
We thus estimate 2Q13F core profit at Bt226mn, up 47% QoQ and a new record.
However, net profit will be pulled down by an estimated Bt44mn FX loss on its USD
loan, to Bt182mn.
Strong order flows lead to better 3Q13F. According to management, order flows
are very strong and will give an estimated sales growth of 5-7% in 3Q13F. The better
utilization rate (likely to reach ~95%) and baht depreciation lead us to expect it to
break its record again in 3Q13F. The bottom line will also be boosted by booking more
insurance payments (flood damage) in 3Q13F – possibly as much as Bt1bn, well over
our current assumption of Bt400mn.
Upside risk to 2013F. Our 1H13F core profit projection of Bt375mn is equal to 55% of
our full-year forecast of Bt691mn and we look for even better earnings in 2H13F.
Therefore, we see big upside risk to our forecast, despite the fact we already forecast a
new high.
New plant to raise capacity and efficiency. KCE will start building a new plant in
Ladkrabang IE in 3Q13 with a budget of Bt4.7bn through completion in 2016,
consisting of three phases. The building and facility will be completed in 1H14, with
machinery installed and production of the first phase begun in 3Q14. The second phase
will start up in 2015 and phase 3 in 2016. The entire project will raise total capacity by
66%. Funding will be mainly from banks, but DE ratio should still be below 2x, based on
our calculations. This new plant will also raise overall efficiency of the production lines
with greater automation and more efficient machines.
Maintain Buy with Bt19 TP, Bt0.25 interim DPS We project an interim DPS of
Bt0.25, implying 1.7% yield at current share price, with a generous 2013F yield of 4.76%.
Given its earnings turnaround, we are still Buyers and assign a TP of Bt19 based on 13x
PE, which is the sector’s +0.5 SD ten-year average.