The Nation



KCE Electronics

Another record-breaking quarter Outperform

KCE Electronics Plc (KCE)

Action and recommendation

- Excluding FX items, KCE posted core earnings of Bt411mn in 1Q14, up 167.7% YoY

and 19.5% QoQ, in line with our estimate and consensus. While 1Q14 sales and

earnings reached a record high, we believe that demand for automotive PCBs,

largely driven by the improving US and EU economies, will remain strong

throughout the year. With new capacity coming in 4Q14, we believe that KCE

should be able to maintain its impressive growth in 2015-16. The latest closing

price suggests that KCE is trading at undemanding forward PERs of 11.5x in 2014

and 10.1x in 2015, compared to its 3-year past average of 11.0x. We reiterate our

strong conviction on the stock's outlook.

Key investment points

- New quarterly record. KCE showed a bottom line of Bt439mn in 1Q14, up

61.6% YoY and 16.7% QoQ, driven by a growing top line and higher GPM. KCE’s

sales revenue came in at Bt2,765mn in 1Q14, up 38.3% YoY and 10.9% QoQ,

topping our estimate by 9.2%. This reflected the persistently strong demand from

clients and favorable FX movement. KCE’s GPM rose to 31.5% in 1Q14, up from

22.2% in 1Q13 and 28.9% in 4Q13, thanks to improved productivity at the KCET

plant and THB depreciation against USD.

- What surprised us? KCE’s SG&A-to-sales ratio swelled to 16.0% in 1Q14,

compared to our forecast of 13.0%. According to KCE’s MD&A statement, this was

caused by a spike in employee benefit expenses and asset-impairment cost. On the

other hand, KCE recorded interest expense of Bt32mn in 1Q14, lower than our

estimate of Bt45mn, on the back of declining interest-bearing debts. Furthermore,

KCE earned shared profits of Bt11mn in 1Q14, compared to our assumption of nil

for this figure. This was likely driven by a higher combined segment profit from

Thai Laminate Manufacturer Co.,Ltd. (TLM) and Chemtronic Technology (Thailand)

Co.,Ltd. (CT) of Bt132mn in 1Q14, up 106% YoY and 27% QoQ.

- Positive momentum to continue. KCE generated sales revenue of USD85mn in

1Q14, compared to USD67mn in 1Q13 and USD79mn in 4Q13. With potential

recoveries in the US and EU automotive industries, we are convinced that KCE

should be able to achieve its 2014 sales target of around USD330mn-USD340mn,

equivalent or higher than Bt10bn. Note that its 1Q14 top line accounts for around

26.9% of our 2014 sales estimate.

- Attractive valuation. Although the stock has rallied higher than 46% YTD, we

believe that KCE still looks attractive in terms of market multiples. The latest

closing price implies that the stock is trading at a forward 2014-2015 PER of 11.5x

and 10.1x, respectively. We perceive the current level as an attractive entry point

when compared to KCE’s 3-year average PER of 11.0x.

Price catalysts

- FX movement, recovery in underlying markets such as automotive and consumer

electronics, and contribution from a new manufacturing plant

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