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KCE Electronics

Record 4Q13 profit, as expected; weak 1Q14 outlook

KCE Electronics Plc (KCE)

Slightly above our expectation

KCE posted a record high profit for 4Q13 of Bt373m, up by 156% YoY and 13% QoQ. The result exceeded our estimate by 2% and the consensus by 4%, due to a fatter gross margin than assumed. Stripping out an insurance payout and an FX gain, core profit was Bt340m, up by 767% YoY and 7% QoQ.

Results highlights

4Q13 sales totaled Bt2.5bn, up 33% YoY but down 2% QoQ on seasonality. GM expanded further to 28.9percent from 28.5% in 3Q13 on the twin effects of a lower scrap rate (from 3.9% in 3Q13 to 3.5%) and baht depreciation. The SG&A/sales ratio declined from 14.2% in 3Q13 to 12.2% in 4Q13 as a result of the successful implementation of cost control measures. Core profit came to Bt340m. KCE also booked an insurance payout of around Bt33m to its income statement and an FX gain of Bt0.3m. So, net profit posted a new record of Bt373m.

Outlook

1Q14 earnings should increase further YoY, led by top-line and GM expansion. On a QoQ basis, profit is likely to drop QoQ on seasonality. Note, however, that there is scope for upside to the bottom-line from an insurance payout of around Bt100m, if KCE's claim is paid by March. Looking to FY14, we believe the firm will achieve strong YoY core profit growth during 1Q-3Q14. Earnings will decline in 4Q14 when a new plant in Ladkrabang is scheduled to start operating (we don't expect the plant to break even till 2Q15).

What's changed?

We maintain our FY14 projection unchanged for the moment.

Recommendation

We like KCE for its long-term earnings growth profile, led by production efficiency improvements and an expanding top-line. We expect the new Ladkrabang capacity to initially squeeze gross margin in 4Q14, but it will prove to be only a temporary phenomenon. There would be scope for upside to our earnings model if the Ladkrabang plant were to break even earlier than expected. KCE trades at an FY14 core PER of 11.3x, just slightly above the average for our Electronics coverage 11x. We have a BUY rating on the stock with a YE14 target price of Bt28.0




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