Friday, November 22nd, 2024

KCE Electronics Q3 Earnings Miss: Downgraded to HOLD as Challenges Persist






Regional Morning Notes – Company Analysis

Regional Morning Notes – Company Analysis

Broker: UOB Kay Hian

Date: Wednesday, 13 November 2024

KCE Electronics (KCE TB)

3Q24: Results A Significant Miss; Downgrade To HOLD

KCE Electronics, known for manufacturing and distributing printed circuit boards under the KCE trademark, has reported a disappointing 3Q24 performance. The company, which primarily focuses on the automobile PCB segment, saw its net profit plummet to Bt216m, marking a significant decline of 58% year-on-year (yoy) and 66% quarter-on-quarter (qoq).

Financial Performance

The results fell short of both the company’s and consensus expectations by a staggering 60%. This underperformance was due to several factors:

  • Lower revenue
  • Squeezed gross margin
  • Higher SG&A-to-sales ratio

Consequently, the earnings forecasts for 2024-25 have been revised downward by 24% and 15%, respectively. Additionally, the valuation of KCE has been de-rated from its mean PE to -1SD PE, leading to a downgrade to a HOLD recommendation with a lower target price of Bt30.00.

3Q24 Results Summary

Year to 31 Dec (Btm) 3Q24 3Q23 2Q24 yoy chg (%) qoq chg (%)
Net turnover 3,802 4,326 4,012 (12.1) (5.2)
Gross profit 769 951 994 (19.1) (22.6)
EBIT 181 493 449 (63.2) (59.6)
EBITDA 461 779 713 (40.7) (35.3)
Net profit 216 520 635 (58.4) (65.9)
EPS 0.18 0.44 0.54 (58.4) (65.9)
Core profit 216 520 635 (58.4) (65.9)

Detailed Analysis

The significant miss in KCE’s results is attributed to a combination of lower-than-expected revenue, squeezed gross margin, and higher SG&A-to-sales ratio. Specifically, the revenue in US dollar terms for 3Q24 was US\$110m, down 11% yoy and flat qoq. In Thai baht terms, the revenue dropped 12% yoy and 5% qoq to Bt3.8b, falling below estimates.

Key Financials

Year to 31 Dec (Btm) 2022 2023 2024F 2025F 2026F
Net turnover 18,456.3 16,343.6 15,767 17,613 19,254
EBITDA 3,295.4 2,681.3 2,601 2,982 3,248
Operating profit 2,213.5 1,628.9 1,466 1,849 2,118
Net profit (rep./act.) 2,317.2 1,719.6 1,697 2,066 2,329
Net profit (adj.) 2,317.2 1,719.6 1,697 2,066 2,329
EPS (Bt) 2.0 1.5 1.4 1.8 2.0
PE (x) 19.6 26.4 22.3 18.3 16.2
P/B (x) 3.4 3.3 2.7 2.6 2.5
EV/EBITDA (x) 13.7 16.8 14.2 12.4 11.4
Dividend yield (%) 0.6 3.1 3.7 4.5 5.0

Revenue and Margin Analysis

KCE’s gross margin dropped to 20.2% in 3Q24, down from 24.8% in 2Q24 and 22.0% in 3Q23. The margin was affected by several factors, including the appreciation of the Thai baht to Bt34.8/US\$1, increased ratio of copper price to sales, negative consignment sales, and higher production costs due to machinery upgrades.

The SG&A-to-sales ratio also increased to 15.5%, up from 10.6% in 3Q23 and 13.6% in 2Q24. This was primarily due to lower revenue, higher selling costs from increased air freight, and elevated administrative expenses from recording forex losses.

Earnings Revision and Risks

For 2024-25, the net profit forecasts have been revised downward by 24% and 15%, respectively. This adjustment reflects the lower-than-expected revenue and gross margin, as well as higher-than-expected SG&A-to-sales. The ongoing machinery upgrades are expected to impact revenue until the end of 2024, and the gross margin for 4Q24 is anticipated to be lower due to baht appreciation and high raw material prices.

Valuation and Recommendation

KCE Electronics has been downgraded to a HOLD with a target price of Bt30.00, down from the previous Bt56.00. The valuation is based on 17x 2025F PE, pegging KCE’s target PE to -1.0SD from its five-year mean. The downgrade is attributed to expected revenue softness in 4Q24 due to machinery issues and a softer gross margin due to the appreciating baht.

Sector Catalysts

Potential catalysts for the sector include strong demand from the automotive industry, baht depreciation, lower raw material prices, and higher capacity and utilization rates.

Environmental, Social, and Governance (ESG)

KCE Electronics is committed to several ESG initiatives, including reducing greenhouse gas emissions, promoting sustainable production and consumption practices, supporting human rights, facilitating labor association participation, and conducting business transparently and fairly.

Key Operating Statistics

Revenue by products (US\$m) 3Q24 3Q23 2Q24 yoy ppt chg qoq ppt chg
2 layers of PCB 9.0 10.2 8.4 (11.5) 8.0
4 layers of PCB 32.6 32.8 34.6 (0.7) (5.9)
06+ layer of PCB 20.6 23.3 20.2 (11.8) 2.0
Special grade PCB 28.6 26.9 31.5 6.1 (9.2)
Total 90.8 93.3 94.7 (2.7) (4.1)

Earnings Revision

2024F New Old Change 2025F New Old Change
Sales 15,767 16,699 -5.6% Sales 17,613 19,308 -8.8%
Net profit 1,697 2,241 -24.3% Net profit 2,066 2,427 -14.9%
GPM (%) 23.1 24.5 -1.4 GPM (%) 24.1 24.9 -0.8
SG&A-to-sales (%) 13.8 12.2 1.6 SG&A-to-sales (%) 13.6 13.3 0.3

Key Metrics

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Year to 31 Dec (%) 2023 2024F 2025F 2026F
Profitability EBITDA margin 16.4 16.5 16.9 16.9
Pre-tax margin 11.5 11.8 12.8 13.2
Net margin 10.5 10.8 11.7 12.1
ROA 8.6 9.2 11.8 13.2
ROE 12.7 12.2 14.5 15.7
Growth Turnover (11.4) (3.5) 11.7 9.3
EBITDA (18.6) (3.0) 14.7 8.9
Pre-tax profit (24.5) (0.8) 21.4 12.6
Net profit (25.8) (1.3) 21.7 12.7
Net profit (adj.) (25.8) (1.3) 21.7 12.7
EPS (25.8) (1.3) 21.7 12.7
Leverage Debt to total capital 14.1 13.6 13.2 12.8