KUALA LUMPUR: Selangor state-controlled Kumpulan Perangsang Selangor Bhd (KPS), which is transforming into a manufacturing-based entity, is expected to double its return on equity in the next three years.
BIMB Securities Research said the group is looking to fulfil its value creation plan to enhance its businesses, translating to earnings growth.
Notably, KPS has also disposed of some low-return companies.
“The group is currently undergoing a business transformation that has resulted in significant change in the make-up of the company.
“We believe the new and transformed KPS will fulfil its value-creation plan to enhance businesses and thus realise a sustainable, long-term earnings growth, ” it said.
Given the group’s transformation, BIMB Securities Research expected its core earnings to grow at a compound annual growth rate (CAGR) of 23% from the 2020 to 2023 forecast bolstered by stronger contribution from its manufacturing segment which represents 83% of revenue.
“The manufacturing segment, especially plastic moulding, will ride on the demand wave for consumer electronic products globally in tandem with advancement in technology, ” it said.
KPS earnings before interest, taxes, depreciation and amortisation (ebitda) margin level is between 9% and 11%, above its peers.
BIMB Securites Research reckoned that the market has overlooked KPS due to its fragmented and low-return businesses.
It argued that the group deserved a re-rating on higher price-to-earnings (PE) valuation which would reflect its new business and earnings growth potential from the manufacturing segment.
The stock is trading at 11 times 12-month forward PE, below sector peers at 20 times PE.
“With earnings predicted to soar driven by manufacturing and higher-than-industry average ebitda margin, we believe KPS deserves a re-rating, juxtaposed with recent establishment of at least 30% dividend payout policy, ” it said.
The group has announced a dividend payout policy of a minimum 30% of its profit after taxation and minority interests.
As such, the research house is keeping a “buy” call on KPS with a target price of RM1.60, valuing the stock at 18 times price-to-earnings ratio of 18 times on 2021 earnings per share of 8.9 sen.
Besides that, BIMB Securities Research said the group is also a sustainability believer as it adheres to sustainability standards across its subsidiaries through the establishment of the sustainability framework by integrating the United Nations sustainability development goals.
“This includes the high usage of forest stewardship council certified kraft paper, increase in usage of biodegradable and environment friendly chemicals, adoption of energy efficiency and waste management, ” it explained.
The research house said the group’s strong commitment to sustainability standards would put it in good stead with sustainability-focused investors.