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KCE Electronics

Fatter GM and lower interest expenses prompt earnings projection upgrades

KCE Electronics Plc (KCE)

Investment thesis

Our meeting with executives yesterday confirmed our view of KCE's strong profitability profile. We expect new records to be posted for 4Q13 core and net profit, even though the quarter is normally a low period for sales. Moreover, hefty YoY GM expansion should continue through 1Q-3Q14. As such, we have revised up our FY14 earnings forecast on lower interest expenses and higher GM assumptions, prompting us to raise our YE14 target price from Bt21.4 to Bt28.0, pegged to a core PER of 12.5x, which translates into PEG of 0.9x. Our BUY rating stands.

Strong 4Q13 core profit—no seasonal effect

4Q13 sales look set to be posted in line with management guidance and our assumption of US$75m. Despite the quarter being low season, sales (excluding revenue from Chemtronics) declined only slightly from 3Q13's $77m. We now expect 4Q13 core profit to exceed our previous estimate of Bt240m, due to fatter GM and a lower SG&A-to-sales ratio than assumed earlier. We have upped our 4Q13 GM expectation from 26% to 28%, as we believe it expanded on the twin effects of a lower scrap rate (from about 3.9% in 3Q13 to ~3.5%) and baht depreciation. The SG&A/sales should post a decline from 14.2% in 3Q13 to 13.2% in 4Q13 on cost control.

We now have a new 4Q13 core earnings estimate of Bt333m, up by 199% YoY and 4% QoQ. KCE also booked a gain from an insurance payout of around Bt30m to its income statement. So, net profit should post a new record at Bt364m.

FY14 prospects look secure

Automotive customers will drive FY14 sales. The company guides for a top-line of at least Bt10bn this year, based on client demand. 1Q14 orders-to-date secure 98% of KCE's target for the quarter of at least US$75m and orders are coming in for delivery in 2Q14. We believe management's FY14 target of 10-15percent sales growth in dollar terms is achievable, as big-ticket customers that had shifted to other suppliers in the wake of the 4Q11 flooding are returning. Moreover, new clients plan to increase orders this year.

FY14 forecast raised—lower interest expenses & fatter GM

We have revised up our FY14 earnings projection on a lower interest expenses assumption. KCE received an insurance payout for property damage of around Bt1.3bn during 4Q13 and repaid debt (some of the payout was booked to the income statement, some to the balance sheet). As such, its interest expenses will fall by about Bt18m/quarter. We have also increased our GM assumption to fine-tune for fatter margin guidance from KCE. As such, our FY14 net profit forecast jumps 21percent from our earlier projection to Bt1.3bn (up 26% YoY).

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