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KCE Electronic
KCE <Bt54>

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Strong growth despite pricing pressures

KCE reported 4Q02 earnings of Bt56mn versus our forecast of Bt115mn. Net profit for FY02 rose to Bt148mn, however, compared with just Bt2mn last year. Capacity utilisation, meanwhile, improved to 80% in the final quarter compared with 69% in 3Q02 after KCE offered major clients price cuts of 8-12%.

Although we have revised down our 2003 forecasts, net profit is still expected to surge 174% yoy to Bt405mn. This is based on an estimated 29% jump in sales and a rise in operating margins from 6.9% last year to 11.6% in 2003 following an increase in orders at KCE's new plant in Ayutthaya province.

Despite our earnings downgrade, KCE remains a BUY given that its shares are trading on a 2003 PER and EV/EBITDA of less than 5x. Based on our target price of Bt80/share, the stock offers potential upside of 48%.

Table 1: KCE's earnings forecasts
Year to Dec	2001	2002	2003E	2004E	2005E
Sales (Btmn)	3,502	3,619	4,687	5,773	6,553
Net profits (Bt)	2	148	405	581	711
EPS (Bt)	0.1	4.8	13.1	18.8	23.1
Growth (%)	-100%	5965%	174%	43%	22%
Cash/Shr(Bt)	9.7	16.4	23.9	29.8	34.8
PER (X)	681.7	11.2	4.1	2.9	2.3
BPS (Bt)	53.5	58.2	66.1	72.5	84.6
EV/EBITDA	9.6	7.7	4.6	3.5	2.7
Dividend yield (%)	0.00%	0.00%	4.90%	14.00%	17.10%

Price cuts result in flat sales growth in 4Q02

Price-cutting in PCB products resulted in flat qoq sales growth in 4Q02 despite a sharp improvement in utilisation from 69% in 3Q02 to 80%. SG&A expenses climbed 18.7% qoq to Bt150mn after KCE expanded capacity from 0.9mn square feet per month to 1.2mn sq ft per month in 4Q02. Although capacity expansion boosted KCE's net debt by Bt238mn in the final quarter, interest expenses fell slightly due to recent lending rate reductions.

Table 2: Quarterly income statement

4Q02

4Q01

% Chg

3Q02

% Chg

2002

2001

% Chg

Sales

930

645

44.2%

940

-1.0%

3,619

3,502

3.4%

COGs

706

648

9.0%

727

-3.0%

2,850

2,860

-0.3%

Gross profits

225

-2

9392.5%

213

5.7%

769

641

19.9%

SG& A

150

73

105.8%

127

18.7%

518

439

17.9%

Operating profits

74

-76

198.4%

86

-13.5%

251

202

24.2%

Interest expenses

32

38

-14.9%

34

-4.6%

137

112

22.0%

Non-operating income

22

21

6.2%

12

86.3%

58

59

-1.4%

Pre-tax income

64

-93

168.9%

64

0.3%

172

149

15.7%

Net profits

56

-133

142.4%

55

2.7%

148

2

7012.0%

EPS

1.8

-4.4

141.3%

1.8

2.6%

4.8

0.1

6821.2%

Gross margins (%)

24.2

-0.4

22.6

21.2

18.3

Operating margins (%)

8

-11.7

9.1

6.9

5.8

Sharp improvement in utilisation levels

Utilisation at KCE's older two plants, which have combined capacity of 600,000 square feet per month, averaged 95% in 4Q02. Meanwhile, utilisation at the first phase of the new plant, KCE Technology in Ayutthaya province (capacity of 300,000 square feet per month) averaged 75%.

Figure 1: Printed Wiring Board- PWB and estimated capacity utilization

Source: Semiconductor Industry Association: SIA and Kimeng Estimates

The company secured orders from German Auto PCB, Scientific Atlanta, Northern Telecom and Western Digital in the final quarter. Demand for its PCBs came from European auto makers and the telecom industry, particularly producers of satellite set-top boxes. In 1Q03 KCE received new orders from Japanese clients, such as Sharp and Hitachi, and Western Digital for hard disk drives.

In order to boost utilisation levels at KCE Technology, the company offered price cuts of 8-12% to major clients. Despite the discounts, gross margins rose from 22.6% in 3Q02 to 24.2% as the new plant led to improvements in operating efficiency.

Rising debt is not a serious concern

Capacity expansion lifted KCE's borrowings to Bt3bn in 4Q02, with gearing rising slightly to 1.67x. This is of no major concern, however, given KCE's strong cash flow and wider margins. KCE's recorded a negative free cash flow of Bt527mn last year but this should reverse to a surplus of Bt384mn in 2003. Meanwhile borrowing levels and gearing are forecast to decline to Bt2.6bn and 1.24x by end-2003.

Table 3: Financial ratios
	Q4/01	Q1/02	Q2/02	Q3/02	Q4/02
Gearing	1.57	1.53	1.51	1.56	1.67
Interest Cover	-2	0.6	2	2.5	2.3
Inventory Days	78	83	89	81	87
Collection Days	69	92	112	113	105
Payment Days	40	71	74	76	77
Net debt (Btmn)	2,245	2,200	2,287	2,394	2,632
Working capital (Btmn)	962	917	1,090	1,074	1,122

2003 earnings forecast revised down by 28%

We have reduced our sales forecast by 11% this year to Bt4.7bn but revised up our estimate for operating margins to 11.6%. Given overall weakness in the global PCB industry, our earlier earnings forecast of Bt561mn for this year now looks too optimistic and we have cut our estimate by 28% to Bt405mn.

Table 4: Profit forecasts revision
	Original			Revision		Change
	2001	2002E	2003E	2002E	2003E	2002E	2003E
Sales	3,619	3,851	5,291	3,619	4,687	-6%	-11%
Gross Margins	18.3%	21.5%	23.3%	21.2%	24.6%
SG& A Per Sales	14.6%	13.5%	13.0%	13.5%	13.0%
Operating Margins	3.7%	8.0%	10.3%	6.9%	11.6%

Net profits	2	214	561	148	405	-31%	-28%

Income statement
(Btmn)	2001	2002	2003F	2004F	2005F
Sales	3,502	3,619	4,687	5,773	6,553
COGs	2,860	2,850	3,533	4,298	4,879
Gross margins	641	769	1,154	1,476	1,674
SG&A	512	518	609	722	786
Operating margins	129	251	544	754	888
Interest expenses	150	137	141	139	127
Other income	59	58	55	67	72
Pretax profits	38	172	459	681	833
Income taxes	16	29	55	102	125
Associate earnings	1	2	1	0	1
Minority interests	5	7	-1	-2	-3
Extraordinary items	-15	10	-	-	-
Net income	2	148	405	581	712

Balance sheet
(Btmn)	2001	2002	2003F	2004F	2005F
Cash equivalent	348	369	303	283	269
Receivable	666	1,043	1,053	1,265	1,436
Inventories	612	678	726	907	1,043
Investment	46	41	41	41	41
Fixed Assets	3,033	3,600	3,507	3,372	3,212
Total assets	4,761	5,783	5,689	5,922	6,057

Credits	289	600	542	648	762
ST-debts	1,091	1,366	1,795	1,390	1,155
LT-debts	1,502	1,636	845	1,027	855
Other liability	231	388	389	391	393
Equities	1,648	1,794	2,118	2,466	2,893

Cash flow statement
(Btmn)	2001	2002	2003F	2004F	2005F
Net Profit	2	148	405	581	711
Depre./Amort.	276	309	331	335	359
Net Working Cap.	244	-133	-115	-288	-192
Unrealized F/X	8	21	-	-	-
Cash flow from operations	485	342	623	631	881

CAPEX	-373	-869	-238	-199	-198
Investment	1	-5	-	-	-
Cash flow from investing	-583	-727	-238	-199	-198

Debt Movement	193	409	-362	-223	-407
Capital Call	-	19	0	-	-
Dividend Paid	-	-	-81	-232	-284
Cash flow from financing	198	406	-443	-455	-692

Free cash flow	112	-527	384	432	683

Financial ratios
	2001	2002	2003F	2004F	2005F
Gross margins	18.3%	21.2%	24.6%	25.6%	25.5%
Operating margins	3.7%	6.9%	11.6%	13.1%	13.5%
Net gearing (x)	0.91	0.91	0.4	0.42	0.3
Interest coverage (x)	1.3	2.7	4.3	5.9	7.5
Inventory Days	78	87	75	77	78
Collection Days	69	105	82	80	80
Payment Days	37	77	56	55	57

Analyst: Pongpan(Ext. 1450)
Email: pongpan@kimeng.co.th

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