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KCE Electronics

To extend growth from its best year

KCE Electronics Plc (KCE)

Action and recommendation

- Reiterate Outperform. After attending its analyst meeting, we continue to hold

our positive view of KCE’s business outlook. We revise up its core profit by 15.9%

and 13.4% in 2014-15, amid strong demand for PCBs and on an enhanced GPM.

On the back of the recoveries in the U.S. and E.U. markets, KCE’s management

hinted that the company has continued to run at almost full capacity since 2H13.

Given its little exposure to domestic political risk, we expect this positive trend to

continue in 2014-15. We raise our 2014 fair value to Bt29.5, from Bt25.4, and

maintain our Outperform rating on the stock.

Key investment points

- Growth outlook maintained in 2014-15. We expect that KCE will achieve core

profits of Bt1,251mn in 2014 and Bt1,368mn in 2015, with corresponding YoY

growth rates of 21.5% and 9.4%, mainly on the back of consistently strong orders

from clients and improved operational efficiency. As we expect the global economy

to recover further in 2014-15 and with the continued structural shift toward hybrid

cars and electronic vehicles, KCE should be able to grow its top line at rates of

6.1%-8.5% with utilization rates in a range of 99.0%-103.0%. We also believe that

KCE’s GPM will improve to 27.5% in 2014-15, compared to 26.3% in 2013, thanks

to its enhanced productivity.

- Stronger balance sheet. Management hinted that the company would receive

insurance compensation totaling around Bt1,600mn during 4Q13-2Q14 and that it

also expected around Bt200mn from the exercise of KCE-W2 during the same

period. We estimate that these funds, together with internal cash flow, will lower

KCE’s D/E ratio to 1.1x in 2014 and 0.7x in 2015, compared to 1.6x in 2013.

- Upward fair value adjustment. To reflect the higher sales growth and improved

profitability, we revise up our core EPS estimates by 15.6% and 13.1% in 2014-15.

Pegging our fair value estimate to a target PER of 12.0x, we therefore derive a

2014 fair value of Bt29.5, up from Bt25.4. Note that we have not factored in KCE’s

new plant into our valuations as we would like to obtain more details to fully

estimate its impact.

- Earnings momentum to continue in 4Q13. Given the persistently strong

demand for its products, we expect KCE to post core earnings of Bt322mn in 4Q13,

up 79.9% YoY and 1.5% QoQ. We estimate that KCE will generate sales revenue

of Bt2,453mn in 4Q13, up 31.3% YoY but down 3.4% QoQ. While the YoY

improvement will be driven mainly by the enhanced operation at KCET, an

Ayudhaya-based plant, we expect QoQ decline will be the result of seasonal

factors. Nonetheless, we expect KCE’s GPM to remain high at 28.6% in 4Q13,

compared to 20.5% in 4Q12 and 28.5% in 3Q13, driven by lower scrap rates and

the THB’s depreciation against the USD. Besides, we expect KCE to receive

insurance claim proceeds of Bt1,125mn in 4Q13, driving down its D/E ratio to 1.6x

at the end of 2013 from 2.2x in 3Q13.

Price catalysts

- Recoveries in key international markets, improved profitability at KCET, foreign

exchange movement, and timing of operation of new plant

The Nation


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