KCE: Growth outlook still challenging February 15, 2018

Looking into FY18, even though management anticipated a 12%-15% y-y increase in sales due to growing purchase orders from both existing and new customers, sustained baht strength still puts a lid on margins because every one baht rise in its value will slash its gross profit margin by 1.6%-1.7%. However, the raw material costs are unlikely to put much pressure on KCE’s operations for the year.

In our view, FY18 profit growth remains challenging as the baht is still strong and KCE’s effort to generate revenue from sales of high-margin HDI is hindered by production-related problems, which have resulted in a modest recovery in its 1HFY18 performance. In this sense, we cut out FY18 profit estimates by 13%.

We expect sales will grow 12% y-y but margin will inch down 1% due to the downward revision of the baht. We also nudge our net profit estimates down to Bt2,542mn, flat y-y. At current trading levels, we recommend an ‘ACCUMULATE’ stance on KCE with a downwardly revised target price of Bt78/share.

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