KPS is acquiring a 100% equity stake in MDS from two individuals for RM85m cash. MDS is primarily engaged in the manufacturing of precision metal components. It offers high-precision computerised numerical control metal machining encompassing metal cutting and milling. The acquisition comes with a net profit guarantee of RM8 million and RM9 million for FY23 and FY24, respectively, and is expected to be completed by end-1QFY23.
Hence Kenanga Research is positive on the acquisition which provides synergy and is earnings-accretive. It raised its FY23F core net profit by 9%, lift TP by 10% to RM0.85 (from RM0.77) and maintain its OUTPERFORM call.
The deal values the asset at 10.6x and 9.4x FY23F and FY24F PERs, which are fairly consistent with the forward PER of the manufacturing sector of 10x (which is also our target forward PER for KPS). The acquisition will raise KPS’s net debt and gearing of RM117m and 0.1x as at end-3QFY22 to RM203m and 0.2x, respectively, which are still highly manageable.
The research house is positive on the deal as it will strengthen the group’s core manufacturing business and allow it to move towards higher margin product mix. As MDS and KPS share similar key clients, the integration would allow the group to expand its product offering to these clients and boost business dynamics. Hence, it believes the acquisition fits its long-term business strategy and expect enhancement in overall business efficiencies as well as cost optimisation within its manufacturing segment.
Forecasts. Kenanga has raised its FY23F earnings by 9% to reflect the earnings enhancement from the acquisition.
The research house likes KPS for: (i) the strong growth prospects of the consumer electronics industry which is the main client of its products and services, (ii) its long-term growth underpinned by expansion at its overseas operations, and (iii) the greater role it is playing in the supply chain of a renowned privately-owned innovator of high-tech consumer electronic appliances.
Kenanga Research raises its TP by 10% to RM0.85 (from RM0.77) based on 10x FY23F PER, which is in line with the average forward PER of manufacturing sector: There is no adjustment to its TP based on ESG given a 3-star rating. It maintains OUTPERFORM rating on the counter.
Risks include the global economy slipping into a sharp slowdown or recession; escalating input costs, and termination or non-renewal of contracts by key clients, resulting in both financial and reputational loss.
