Kronologi Asia Berhad - Struggling with higher costs
Fri, 29-Mar-2024 08:38 am
by Jayden Tan • Apex Research

Counter

KRONO (0176)

Target Price (RM)

0.44

Recommendation

Buy

  • Results review. In 4QFY24, core net profit sank 86.5% yoy to RM1.6m, primarily due to lower revenue and higher costs, particularly from depreciation and forex losses. However, there was an improvement of 59.6% qoq, attributed to the seasonally stronger revenue in the fourth quarter. Despite a 14.2% yoy decline, revenue for the quarter increased by 34.3% qoq to RM91m.

  • Profit missed expectations. In FY24, the cumulative net profit of RM8.2m only represents 63% of our forecasted net profit of RM13.1m, despite revenue meeting our forecast. The variance was primarily due to a lower-than-expected contribution from the EDM As-A-Service division, which typically offers better margins. Additionally, operating costs, particularly in depreciations and selling and distribution costs, were higher than expected. We believe this reflects the management's focus on capturing market share, which impacted profitability.

  • Operations Highlights. The EDM IT segment revenue increased +50% qoq, while core net profit jumped +245% qoq, primarily due to the seasonal strength of the 4Q2023, driven by high IT capital expenditure from customers. Meanwhile, the EDM AAS segment remain challenging, with flat revenue (+1% qoq) and a decline in net profit (-61% qoq).

  • Industry Highlights. Rapid advancement of generative AI development fueled an increase in demand for data storage. Data storage has become indispensable for organisations handling vast amounts of data to train and develop their AI models. We anticipate that Krono will leverage to the promising industry outlook and benefit significantly from the AI boom.

  • Outlook. Despite disappointing results in FY24, we maintain our optimistic view regarding the longer-term prospects. We anticipate the Group will recover alongside the broader economy in the next calendar year, as businesses CAPEX ramping up alongside with a clearer economic outlook. However, we remain cautious over Krono's China operation, as ongoing tensions between China and US may affect corporate willingness to expand data storage investments in China.

  • Valuation. Cut our earnings forecast by 21% for FY25F, to adjust for the higher-than-expected depreciation costs and introduce RM 29.1m net profit for FY26F. Re-iterate our BUY recommendation on Krono with lower target price of RM0.44 to reflect the changes in earnings forecasts.

  • Risk. Revenue lags behind escalating costs (depreciation and selling cost) due to management aggressively capture market share.
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