KCE Electronics

Q4 2012 numbers beat all estimates; stronger quarters ahead

KCE Electronics Plc (KCE)



Beat all estimates

KCE reported solid earnings for 4Q12 of Bt213m, down by 13% QoQ (on a smaller insurance payout and a lower FX gain), but a turnaround from the loss of Bt99m reported for 4Q11. Stripping out the insurance payout and FX gain, core profit was 106m, a 210% QoQ jump and a YoY turnaround from the loss of Bt228m posted for 4Q11. The result exceeded the consensus estimate by 7% and our number by 26%, due to a better-than-expected top-line, GM expansion from the consolidation of Chemtronics and a lower-than-assumed SG&A/sales ratio.

Results highlights

Revenue rose by 6% QoQ and 52% YoY to Bt1,868m—orders improved strongly QoQ to pre-flooding levels. GM fattened by 280 bps YoY and 250 bps QoQ to 20.5% in 4Q12. We think the acquisition of Chemtronics boosted GM by 50 bps QoQ and broad efficiency improvements by a further 200 bps QoQ. The SG&A/sales ratio was 13%, down 150 bps QoQ on increased sales. KCE also posted an FX gain of Bt58m and an insurance payout of Bt49m for the quarter.

Outlook

The firm should post its best post-flooding core earnings yet for 1Q13. KCE told us that orders were strong in Jan and sales growth should be sustained through 2H12. As such, it targets FY13 top-line growth of at least 20%, which looks achievable, in our view. KCE Technology's operational capacity has risen to 800,000sqf/month (80% of its pre-flooding level), which is currently fully utilized. The firm expects PCB drilling capacity to increase 15% on Feb 18 with the addition of seven new drilling machines. KCE Tech's capacity should jump by 25% by June.

The acquisition of Chemtronics should enable top-line growth of about 2% and GM expansion of 50 bps. More importantly, the firm targets reducing its scrap rate to below 4.5percent from 6% last year. As such we anticipate further margin expansion of 200 bps YoY to 21.2% in FY13. Core profit should jump a hefty 871% YoY to Bt610m from the low base set by FY12, boosted in part by operational improvements.

What's changed?

Our FY13-14 earnings forecasts rise by 25% and 21%, respectively, to factor in more bullish GM assumptions (see Figure 2), up 200 bps YoY from 19.2% in FY12—50bps from the Chemtronics consolidation and 150 bps from efficiency improvements.

Recommendation

We like KCE for its GM expansion story and order book growth outlook. Our BUY rating stands with a new YE13 target price of Bt14, pegged to its long-term mean EV/EBITDA of 7x. The stock currently trades at an FY13 EV/EBITDA of 6.1x which implies a PER of 8.9x, below the Electronics mean of 11.4x, but KCE's core earnings growth profile is much better.