In-Depth Analysis of KCE Electronics: Navigating Through the Clouds

Broker: UOB Kay Hian | Date: 19 November 2024

Introduction to KCE Electronics

KCE Electronics, a major player in the production and distribution of printed circuit boards (PCBs) under the KCE trademark, is particularly focused on the automotive sector. Despite its critical role in the technology space, the company is currently navigating through a challenging period marked by a cloudy outlook that is expected to persist into the fourth quarter of 2024.

Current Market Position and Stock Data

The company’s share price is currently at Bt28.00, aligning with its target price, indicating a neutral position with no expected upside. The company’s market capitalization stands at Btm 33,098.5 (approximately US\$m 950.2), with a significant portion of shares owned by the Ongkosit Group (33.2%). The stock has seen a substantial decline over the past year, with a 52-week range between Bt57.50 and Bt27.25.

Challenges in the Automotive Sector

KCE Electronics is grappling with a weak demand from the automotive sector, which is adversely affecting its multilayer PCB products. The company’s revenue in the fourth quarter of 2024 is anticipated to decline by 5-7% quarter-on-quarter in US dollar terms due to this sectoral weakness. Furthermore, the company is operating at full capacity for high-density interconnect (HDI) products, and ongoing machinery replacements are also straining production capabilities.

Financial Performance and Outlook

KCE’s financial performance has mirrored its operational challenges. The company reported a net profit of Bt225 million for the third quarter of 2024, marking a 58% year-on-year decline. Revenue in US dollar terms was US\$110 million, reflecting an 11% year-on-year decrease. The baht’s appreciation further impacted the gross margin, which dropped to 20.2%.

Revised Earnings Forecast

In light of these challenges, UOB Kay Hian has revised KCE’s earnings forecasts, reducing 2024-25 net profit projections by 5% and 10% respectively. The company’s revenue growth forecast for 2025 has also been downgraded to a range of 0-5%, down from high single-digit expectations, primarily due to anticipated weak demand in the US and European automotive markets.

Expectations for 2025

Looking ahead, KCE Electronics expects some relief in 2025 with a projected improvement in gross margins to 26%, driven by cost reductions, manpower optimization, and increased machine efficiency. However, given the expected softer revenues and potential currency fluctuations, the gross margin is cautiously projected at 23.8% for 2025.

Key Financial Indicators

The company’s key financial metrics reveal a challenging landscape. The net turnover is projected to decrease from Btm 16,343.6 in 2023 to Btm 15,081 in 2024, before potentially rising to Btm 16,020 in 2025. Despite these challenges, the company maintains a strong balance sheet with a projected net cash position improving significantly by 2026.

Valuation and Recommendation

UOB Kay Hian maintains a ‘HOLD’ recommendation for KCE Electronics with a target price of Bt28.00, reflecting a cautious stance given the current market uncertainties. This valuation is based on a 17x 2025F PE, pegged at -1.0 standard deviation from its five-year mean, reflecting a conservative outlook due to expected earnings impacts from ongoing machinery issues and revenue pressures.

Potential Catalysts and ESG Considerations

Potential positive catalysts for KCE could include stronger-than-expected demand from the automotive industry, favorable currency movements, and lower raw material prices. Additionally, the company is committed to reducing greenhouse gas emissions and promoting sustainable business practices, as highlighted in its Environmental, Social, and Governance (ESG) initiatives.

Conclusion

KCE Electronics is navigating a challenging period characterized by sectoral weaknesses and operational constraints. However, with strategic cost reductions and efficiency improvements, the company is positioning itself for recovery and growth in the coming years. Investors are advised to maintain a cautious stance, monitoring key market and operational developments closely.